[MUSIC] Breakeven point is the level of output at which a firm makes zero profit. In other words, it's where total costs equals total revenue. There are some assumptions made when using break even analysis, one of those being that fixed costs remain constant. The variable costs vary proportionally with volume of output, and all other factors remain unchanged. For example, selling prices remain constant. Methods of efficiency and production, unchanged. And it is volume which is the sole factor that affects costs. Let's have a look at breakeven analysis using the equation method. We know that total revenue and total cost, when they're equal, that's breakeven point. Or alternatively, we can say sales equals variable costs plus fixed costs plus your net profit. So let's put the equation method into an example. If we have a unit selling price of 10 pounds, a variable cost of 4 pounds, and fixed costs of 150,000 pounds per year. That is for one unit, selling price of 10, a unit variable cost of 4, and fixed costs of 150,000 per year. The current output is 40,000 units but can be increased to 50,000 units. The only reason I mention that, it means there's scope within the relevant range to increase without those fixed costs increasing. So the question is, how many units would need to be produced in order to break even? Okay, so let's look at the answer to our question. If we let x represent the number of units of production, and this is common for management accounting, then the equation will read as the selling price, £10 times the number of units, or 10x. The variable cost, 4 pounds times the number of units, that's 4x, plus 150,000. Setting profit at 0, because we're looking for break even. And we can then manipulate that to 6x = 150,000. And then simply by dividing 150 by 6, x then is 25,000 units. That means that I would need to sell, or the business would need to sell 25,000 units to break even. [MUSIC]