Total profit at the break-even point is zero. This computes the total number of units that must be sold in order for the company to generate enough revenues to cover all of its expenses. Their variable costs associated with producing the widget are raw material, factory labor, and sales commissions.
This means that the selling price of the good must be higher than what the company paid for the good or its components for them to cover the initial price they paid variable and fixed costs. Moreover, the break-even point is also helpful to managers as the provided info can be used in making important decisions in business, for example preparing competitive bids, setting prices, and applying for loans.
In many cases, if an entrepreneurial venture is seeking to get off of the ground and enter into a market it is advised that they formulate a break-even analysis to suggest to potential financial backers that the business has the potential to be viable and at what points.
The contribution margin ratio reveals the percentage of sales that applies to your fixed costs after covering variable costs.
A firm can analyze ideal output levels to be knowledgeable on the amount of sales and revenue that would meet and surpass the break-even point.