7 THREE APPROACHES TO BREAK-EVEN ANALY-FIXED COSTS DO NOT CHANGE, TH...

6-7 Three approaches to break-even analy-

fixed costs do not change, then a dollar increase

sis are (a) the graphical method, (b) the equa-

in contribution margin will result in a dollar in-

tion method, and (c) the contribution margin

crease in net operating income. The CM ratio

method.

In the graphical method, total cost and

can also be used in break-even analysis. There-

total revenue data are plotted on a graph. The

fore, for planning purposes, knowledge of a

product’s CM ratio is extremely helpful in fore-

intersection of the total cost and the total reve-

nue lines indicates the break-even point. The

casting contribution margin and net operating

graph shows the break-even point in both units

income.

and dollars of sales.