A key relationship in CVP analysis is the level of activity at which total revenues equal total costs (both fixed and variable). This level of activity is called the break-even point.
The break-even point is the point where total revenue received equals total costs associated with the output of the restaurant or the sale of the product.
At this volume of sales, the company will realize no income but will suffer no loss. The process of finding the break-even point is called break-even analysis. Knowledge of the break-even point is useful to management when it decides whether to introduce new product lines, change sales prices on established products, or enter new market areas.
The break-even point can be:
- Computed from a mathematical equation
- Computed by using contribution margin
- Derived from a cost-volume-profit (CVP) graph.
The break-even point can be expresses either in sales units or sales.
Break-even point refers to the price at which a transaction produces neither a gain nor a loss.
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