Break even analysis

The breakeven point for a product, brand, or company is the point where
total revenue equals total costs (TR=TC). At a price or quantity greater
than this point, the firm is making a profit ; below this point, a loss. It
is calculated by:

Total fixed costs / (price - average variable costs)

It is particularly useful in comparing the profit consequences of
alternative prices. By inserting different prices into the formula, you will
obtain a number of break even points.

To make the results clearer, they are usually graphed. You first draw the
cost curves (TC and FC in the diagram). Then calculate the break even points
(A,B,C) and plot them on the total cost curve (TC). Drawing a line from the
origin through a break even point will produce a linear total revenue curve
(like R1, R2, and R3).

Limitations

   * This is only a supply side (ie.: costs only) analysis.
   * It tells you nothing about whether you can actually sell the product at
     these prices.
   * It assumes that fixed costs (FC) are constant
   * It assumes variable costs are constant per unit of output

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