Break Even Analysis is done to estimate how much company should sell to meet its total cost. It means that it is the point at which the entity is not earning the profit and even not incurring any loss.
Example Question
Alpha industry manufactures solar fans. The sales revenue is $10,000 fo 500 units. The variable cost is $10 per unit. While the fixed cost is $5,000.
Solution/ Answer
| Sales Revenue | 10,000 |
| Variable Cost (10×500) | 5,000 |
| Contribution Margin | 5,000 |
| Fixed Cost | 5,000 |
| Profit/ Loss | 0 |
It is clear from the above calculation that if the company has to make any profit, it has to sell more than 500 units. Currently, it is operating at break-even point and just covering its cost of manufacturing the solar fans.