Break-even analysis can be used in three separate but related ways:

1.       To analyze a program to modernize and automate, where the firm would be operating in a more mechanized, automated manner and substituting fixed costs for variable costs. 

2.       To study the effects of a general expansion in the level of operations. 

3.       In new product decisions:  How large must the sales volume on a new product be if the firm is to break even on the proposed project?

 The fixed costs can be estimated quite accurately; the variable costs, most of which are set by contracts, can also be estimated precisely (and they are linear).  The sales price is variable, but competition keeps prices within a sufficiently narrow range to make a linear total revenue curve reasonable.

Total fixed costs	R 80,000
Total variable costs per unit	R     9.70
Sales price per unit	R   20.00
Applying the following formula, we find the break-even sales volume to be 7,767 units
Break-even point	=   total fixed costs      =	_FC__
(sales volume)	1-  total variable costs	1- _VC__
	total sales volume	P . Q

                                                                                                            
Break-even
Point Based on
Dollar Sales

Calculating break-even points on the basis of dollar sales instead of on units of output is frequently useful.  The main advantage of this method is that it enables one to determine a general break-even point for a firm that sells many products at varying prices.   Furthermore, the procedure requires a minimum of data.  Only three values are needed:  sales, fixed costs, and variable costs.