The objective of a business is to make profits. Profits are the difference between total total revenue and total costs. Profits are influenced by several factors. The most important among them are :The selling price of the product,The volume of sales,The cost of production. Each of these factors are interdependent. The cost-volume-profit (CVP) analysis is used to study the relationship between costs, volume of sales and profits.
The most widely known form of CVP analysis is the Break-Even Analysis (BEA). This analysis establishes the relationship between revenue and costs with respect to volume of output. It has considerable significance for economic research,business decision making,company management,investment analysis etc. ‘Joel Dean’ says that BEA presents flexible projections of impact of volume of output on costs,revenue and profits.
The break-even point may be defined as the point of sales at which total cost is equal to total revenue. Hence,it is the point of no profit no loss.
The firm must know the profit and loss zone of its operation. In other words, it must-known the profitable and non-profitable range of production. Break-even or profit and loss analysis is an important technique used to determine the profitable and non-profitable ranges of production.
The total revenue and total costs are plotted an Y-axis. Output is shown an X-axis. TFC shows the fixed costs. It is horizontal at Rs. 1000 level. The distance between TC and TFC shows total variable costs. TR is the total revenue curve i.e.,price x quantity. The break-even point is the intersection of TR and TC. With 2000 units of output, TR=Rs. 2000 and TC= Rs.2000.
At a smaller output, TC lies over TR. The firm incurs loss. You can see the loss range of output. At output more than 2000 units, TR lies above TC. Then the firm makes profit. It presents profit zone. The break-even point TC = TR. There is neither profit nor loss.
Suppose the fixed consists of a factory are Rs.2,10,000 per year,the variable costs are Rs.7 per unitand the selling price is Rs.10 per unit. The break even point would be