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Break-even analysis is a management tool which supports planning and decision making by clarifying the effects of change in output and selling price on profitability. It illustrates the relationship between output, sales revenue, variable and fixed costs and profit. A business breaks even when contribution (sales - variable costs = contribution) equals fixed costs, meaning all costs are covered, neither a profit nor loss is being made. A company can use the break-even analysis also for …

…costs are fixed and unaffected by changes in volume whereas other variable costs will vary with changes in volume. In the long run all costs will be variable. To sum up, one can say that break-even analysis is a useful basis management tool to understand the concept of business. But it has limitation since the assumptions are not always applicable to reality. A company has to keep those assumptions in mind when using break-even analysis.