FIN 370 Week 2 DQ 6 -
Accounting break-even analysis involves determining the level of sales necessary to cover total fixed costs, that is, both cash fixed costs (or fixed operating costs before depreciation) and depreciation. We use the term accounting break-even to refer to the fact that we are using accounting costs, which include non-cash flow items, specifically, depreciation.
Performing an accounting break-even analysis requires that we decompose production costs into two components: fixed costs and variable costs. This decomposition depends upon whether the costs being analyzed vary with firm sales (variable costs) or not (fixed costs).