Note that there are costs that are traditionally identified as the fixed costs that are for periods of time without subject to change depending on the volume of production. The variable cost, the change in proportion to changes in the level of production, in this case, the raw materials vary with the volume produced. The importance of verification of the equilibrium point is defined as the point of equilibrium, the level at which sales volume is equal to total costs, better define the point at which the benefit is zero.
For managers, it is essential to design the production level that generate the income necessary and sufficient to cover total costs, the sales volume necessary to obtain certain benefits, the expected benefit for a given level of sales and any change in costs (fixed and variable), the selling price or quantity will affect earnings. Understanding cost behavior facilitates the analysis to determine the level of operations could maximize profits. The break even analysis is based on the breakdown of costs (fixed and variable), and follows the equation writing costs as: CT = CF + CV Where: CF TC = total cost = fixed costs variable cost CV = Revenue = P x Q Where: P = price / unit Q = Profit = R – CT Where: R = Revenue CT = total cost, and: Profit = Total Contribution Margin – Fixed Cost Difference (P – V) between price and variable cost per unit is defined as the unit contribution margin.