break even analysis occurs in which area of the business plan quizlet

What is Break-Even Analysis?

What is the break-even analysis formula, break-even analysis example, graphically representing the break-even point, free cost-volume-profit analysis template, download the free template, interpretation of break-even analysis, sensitivity analysis.

Factors that Increase a Company’s Break-Even Point

How to reduce the break-even point

Additional resources, break even analysis.

The point in which total cost and total revenue are equal

Break-even analysis in economics, business, and cost accounting refers to the point at which total costs and total revenue are equal. A break-even point analysis is used to determine the number of units or dollars of revenue needed to cover total costs ( fixed and variable costs ).

Example of Cost-Volume-Profit (CVP) Graph, showing number of units in X-axis and dollars in Y-axis

Key Highlights

Break-even analysis refers to the point at which total costs and total revenue are equal.
A break-even point analysis is used to determine the number of units or dollars of revenue needed to cover total costs.
Break-even analysis is important to business owners and managers in determining how many units (or revenues) are needed to cover fixed and variable expenses of the business.

The formula for break-even analysis is as follows:

Break-Even Quantity = Fixed Costs / (Sales Price per Unit – Variable Cost Per Unit)

Fixed Costs are costs that do not change with varying output (e.g., salary, rent, building machinery)
Sales Price per Unit is the selling price per unit
Variable Cost per Unit is the variable cost incurred to create a unit

It is also helpful to note that the sales price per unit minus variable cost per unit is the contribution margin per unit. For example, if a book’s selling price is $100 and its variable costs are $5 to make the book, $95 is the contribution margin per unit and contributes to offsetting the fixed costs.

Colin is the managerial accountant in charge of Company A, which sells water bottles. He previously determined that the fixed costs of Company A consist of property taxes, a lease, and executive salaries, which add up to $100,000. The variable cost associated with producing one water bottle is $2 per unit. The water bottle is sold at a premium price of $12. To determine the break-even point of Company A’s premium water bottle:

Break Even Quantity = $100,000 / ($12 – $2) = 10,000

Therefore, given the fixed costs, variable costs, and selling price of the water bottles, Company A would need to sell 10,000 units of water bottles to break even.

For more information about variable costs, check out the following video:

The graphical representation of unit sales and dollar sales needed to break even is referred to as the break-even chart or cost-volume-profit (CVP) graph. Below is the CVP graph of the example above:

Example of Break-Even Graph or Cost-Volume-Profit (CVP) Graph, showing number of units in X-axis and dollars in Y-axis

Explanation:

The number of units is on the X-axis (horizontal) and the dollar amount is on the Y-axis (vertical).
The red line represents the total fixed costs of $100,000.
The blue line represents revenue per unit sold. For example, selling 10,000 units would generate 10,000 x $12 = $120,000 in revenue.
The yellow line represents total costs (fixed and variable costs). For example, if the company sells 0 units, then the company would incur $0 in variable costs but $100,000 in fixed costs for total costs of $100,000. If the company sells 10,000 units, the company would incur 10,000 x $2 = $20,000 in variable costs and $100,000 in fixed costs for total costs of $120,000.
The break even point is at 10,000 units. At this point, revenue would be 10,000 x $12 = $120,000 and costs would be 10,000 x 2 = $20,000 in variable costs and $100,000 in fixed costs.
When the number of units exceeds 10,000, the company would be making a profit on the units sold. Note that the blue revenue line is greater than the yellow total costs line after 10,000 units are produced. Likewise, if the number of units is below 10,000, the company would be incurring a loss. From 0-9,999 units, the total costs line is above the revenue line.

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Screenshot of Cost-Volume-Profit (CVP) Analysis Downloadable Template

As illustrated in the graph above, the point at which total fixed and variable costs are equal to total revenues is known as the break-even point. At the break-even point, a business does not make a profit or loss. Therefore, the break-even point is often referred to as the “no-profit” or “no-loss point.”

The break-even analysis is important to business owners and managers in determining how many units (or revenues) are needed to cover fixed and variable expenses of the business.

Therefore, the concept of break-even point is as follows:

Profit when Revenue > Total Variable Cost + Total Fixed Cost
Break-even point when Revenue = Total Variable Cost + Total Fixed Cost
Loss when Revenue < Total Variable Cost + Total Fixed Cost

Break-even analysis is often a component of sensitivity analysis and scenario analysis performed in financial modeling . Using Goal Seek in Excel, an analyst can backsolve how many units need to be sold, at what price, and at what cost to break even.

sensitivity analysis for break-even analysis

Factors that Increase a Company’s Break-Even Point

It is important to calculate a company’s break-even point in order to know the minimum target to cover production expenses. However, there are times when the break-even point increases or decreases, depending on certain of the following factors:

1. Increase in customer sales

When there is an increase in customer sales, it means that there is higher demand. A company then needs to produce more of its products to meet this new demand which, in turn, raises the break-even point in order to cover the extra expenses.

2. Increase in production costs

The hard part of running a business is when customer sales or product demand remains the same while the price of variable costs increases, such as the price of raw materials. When that happens, the break-even point also goes up because of the additional expense. Aside from production costs, other costs that may increase include rent for a warehouse, increases in salaries for employees, or higher utility rates.

3. Equipment repair

In cases where the production line falters, or a part of the assembly line breaks down, the break-even point increases since the target number of units is not produced within the desired time frame. Equipment failures also mean higher operational costs and, therefore, a higher break-even.

In order for a business to generate higher profits, the break-even point must be lowered. Here are common ways of reducing it:

1. Raise product prices

This is something that not all business owners want to do without hesitation, fearful that it may make them lose some customers.

2. Outsourcing

Profitability may be increased when a business opts for outsourcing , which can help reduce manufacturing costs when production volume increases.

Every company is in business to make some type of profit. However, understanding the break-even number of units is critical because it enables a company to determine the number of units it needs to sell to cover all of the expenses it’s accrued during the process of creating and selling goods or services.

Once the break-even number of units is determined, the company then knows what sales target it needs to set in order to generate profit and reach the company’s financial goals.

How the 3 Financial Statements are Linked

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3.2 Calculate a Break-Even Point in Units and Dollars

In Building Blocks of Managerial Accounting , you learned how to determine and recognize the fixed and variable components of costs, and now you have learned about contribution margin. Those concepts can be used together to conduct cost-volume-profit (CVP) analysis , which is a method used by companies to determine what will occur financially if selling prices change, costs (either fixed or variable) change, or sales/production volume changes.

It is important, first, to make several assumptions about operations in order to understand CVP analysis and the associated contribution margin income statement. However, while the following assumptions are typical in CVP analysis, there can be exceptions. For example, while we typically assume that the sales price will remain the same, there might be exceptions where a quantity discount might be allowed. Our CVP analysis will be based on these assumptions:

Costs are linear and can clearly be designated as either fixed or variable. In other words, fixed costs remain fixed in total over the relevant range and variable costs remain fixed on a per-unit basis. For example, if a company has the capability of producing up to 1,000 units a month of a product given its current resources, the relevant range would be 0 to 1,000. If they decided that they wanted to produce 1,800 units a month, they would have to secure additional production capacity. While they might be able to add an extra production shift and then produce 1,800 units a month without buying an additional machine that would increase production capacity to 2,000 units a month, companies often have to buy additional production equipment to increase their relevant range. In this example, the production capacity between 1,800 and 2,000 would be an expense that currently would not provide additional contribution toward fixed costs.
Selling price per unit remains constant and does not increase or decrease based on volume (i.e., customers are not given discounts based on quantity purchased).
In the case of manufacturing businesses, inventory does not change because we make the assumption that all units produced are sold.
In the case of a company that sells multiple products, the sales mix remains constant. For example, if we are a beverage supplier, we might assume that our beverage sales are 3 units of coffee pods and two units of tea bags.

Using these assumptions, we can begin our discussion of CVP analysis with the break-even point.

Basics of the Break-Even Point

The break-even point is the dollar amount (total sales dollars) or production level (total units produced) at which the company has recovered all variable and fixed costs. In other words, no profit or loss occurs at break-even because Total Cost = Total Revenue. Figure 3.3 illustrates the components of the break-even point:

The basic theory illustrated in Figure 3.3 is that, because of the existence of fixed costs in most production processes, in the first stages of production and subsequent sale of the products, the company will realize a loss. For example, assume that in an extreme case the company has fixed costs of $20,000, a sales price of $400 per unit and variable costs of $250 per unit, and it sells no units. It would realize a loss of $20,000 (the fixed costs) since it recognized no revenue or variable costs. This loss explains why the company’s cost graph recognized costs (in this example, $20,000) even though there were no sales. If it subsequently sells units, the loss would be reduced by $150 (the contribution margin) for each unit sold. This relationship will be continued until we reach the break-even point, where total revenue equals total costs. Once we reach the break-even point for each unit sold the company will realize an increase in profits of $150.

For each additional unit sold, the loss typically is lessened until it reaches the break-even point. At this stage, the company is theoretically realizing neither a profit nor a loss. After the next sale beyond the break-even point, the company will begin to make a profit, and the profit will continue to increase as more units are sold. While there are exceptions and complications that could be incorporated, these are the general guidelines for break-even analysis.

As you can imagine, the concept of the break-even point applies to every business endeavor—manufacturing, retail, and service. Because of its universal applicability, it is a critical concept to managers, business owners, and accountants. When a company first starts out, it is important for the owners to know when their sales will be sufficient to cover all of their fixed costs and begin to generate a profit for the business. Larger companies may look at the break-even point when investing in new machinery, plants, or equipment in order to predict how long it will take for their sales volume to cover new or additional fixed costs. Since the break-even point represents that point where the company is neither losing nor making money, managers need to make decisions that will help the company reach and exceed this point as quickly as possible. No business can operate for very long below break-even. Eventually the company will suffer losses so great that they are forced to close their doors.

Ethical Considerations

Break-even analysis and profitability.

The first step in determining the viability of the business decision to sell a product or provide a service is analyzing the true cost of the product or service and the timeline of payment for the product or service. Ethical managers need an estimate of a product or service's cost and related revenue streams to evaluate the chance of reaching the break-even point.

Determining an accurate price for a product or service requires a detailed analysis of both the cost and how the cost changes as the volume increases. This analysis includes the timing of both costs and receipts for payment, as well as how these costs will be financed. An example is an IT service contract for a corporation where the costs will be frontloaded. When costs or activities are frontloaded, a greater proportion of the costs or activities occur in an earlier stage of the project. An IT service contract is typically employee cost intensive and requires an estimate of at least 120 days of employee costs before a payment will be received for the costs incurred. An IT service contract for $100,000 in monthly services with a 30% profit margin will require 4 months of upfront financing of $280,000 balanced over the four months before a single payment is received.

The overall profit at a specific point in time requires a careful determination of all of the costs associated with creating and selling the product or providing the service. An ethical managerial accountant will provide a realistic cost estimate, regardless of management's desire to sell a product or provide a service. What might be a lucrative product on its face needs additional analysis provided by the managerial accountant.

To illustrate the concept of break-even, we will return to Hicks Manufacturing and look at the Blue Jay birdbath they manufacture and sell.

Link to Learning

Watch this video of an example of performing the first steps of cost-volume-profit analysis to learn more.

Sales Where Operating Income Is $0

Hicks Manufacturing is interested in finding out the point at which they break even selling their Blue Jay Model birdbath. They will break even when the operating income is $0. The operating income is determined by subtracting the total variable and fixed costs from the sales revenue generated by an enterprise. In other words, the managers at Hicks want to know how many Blue Jay birdbaths they will need to sell in order to cover their fixed expenses and break even. Information on this product is:

In order to find their break-even point, we will use the contribution margin for the Blue Jay and determine how many contribution margins we need in order to cover the fixed expenses, as shown in the formula in Figure 3.4 .

Applying this to Hicks calculates as:

What this tells us is that Hicks must sell 225 Blue Jay Model birdbaths in order to cover their fixed expenses. In other words, they will not begin to show a profit until they sell the 226 th unit. This is illustrated in their contribution margin income statement.

The break-even point for Hicks Manufacturing at a sales volume of $22,500 (225 units) is shown graphically in Figure 3.5 .

As you can see, when Hicks sells 225 Blue Jay Model birdbaths, they will make no profit, but will not suffer a loss because all of their fixed expenses are covered. However, what happens when they do not sell 225 units? If that happens, their operating income is negative.

Sales Where Operating Income Is Negative

In a recent month, local flooding caused Hicks to close for several days, reducing the number of units they could ship and sell from 225 units to 175 units. The information in Figure 3.6 reflects this drop in sales.

At 175 units ($17,500 in sales), Hicks does not generate enough sales revenue to cover their fixed expenses and they suffer a loss of $4,000. They did not reach the break-even point of 225 units.

Sales Where Operating Income Is Positive

What happens when Hicks has a busy month and sells 300 Blue Jay birdbaths? We have already established that the contribution margin from 225 units will put them at break-even. When sales exceed the break-even point the unit contribution margin from the additional units will go toward profit. This is reflected on their income statement.

Again, looking at the graph for break-even ( Figure 3.8 ), you will see that their sales have moved them beyond the point where total revenue is equal to total cost and into the profit area of the graph.

Hicks Manufacturing can use the information from these different scenarios to inform many of their decisions about operations, such as sales goals.

However, using the contribution margin per unit is not the only way to determine a break-even point. Recall that we were able to determine a contribution margin expressed in dollars by finding the contribution margin ratio. We can apply that contribution margin ratio to the break-even analysis to determine the break-even point in dollars. For example, we know that Hicks had $18,000 in fixed costs and a contribution margin ratio of 80% for the Blue Jay model. We will use this ratio ( Figure 3.9 ) to calculate the break-even point in dollars.

Applying the formula to Hicks gives this calculation:

Hicks Manufacturing will have to generate $22,500 in monthly sales in order to cover all of their fixed costs. In order for us to verify that Hicks’ break-even point is $22,500 (or 225 units) we will look again at the contribution margin income statement at break-even:

By knowing at what level sales are sufficient to cover fixed expenses is critical, but companies want to be able to make a profit and can use this break-even analysis to help them.

Think It Through

The cost of a haircut.

You are the manager of a hair salon and want to know how many ladies’ haircuts your salon needs to sell in a month in order to cover the fixed costs of running the salon. You have determined that, at the current price of $35 per haircut, you have $20 in variable costs associated with each cut. These variable costs include stylist wages, hair product, and shop supplies. Your fixed costs are $3,000 per month. You perform a break-even analysis on a per-unit basis and discover the following:

You have 4 stylists plus yourself working in the salon and are open 6 days per week. Considering the break-even point and the number of available stylists, will the salon ever break even? If it does, what will need to happen? What can be done to achieve the break-even point?

Examples of the Effects of Variable and Fixed Costs in Determining the Break-Even Point

Companies typically do not want to simply break even, as they are in business to make a profit. Break-even analysis also can help companies determine the level of sales (in dollars or in units) that is needed to make a desired profit. The process for factoring a desired level of profit into a break-even analysis is to add the desired level of profit to the fixed costs and then calculate a new break-even point. We know that Hicks Manufacturing breaks even at 225 Blue Jay birdbaths, but what if they have a target profit for the month of July? They can simply add that target to their fixed costs. By calculating a target profit, they will produce and (hopefully) sell enough bird baths to cover both fixed costs and the target profit.

If Hicks wants to earn $16,000 in profit in the month of May, we can calculate their new break-even point as follows:

We have already established that the $18,000 in fixed costs is covered at the 225 units mark, so an additional 200 units will cover the desired profit (200 units × $80 per unit contribution margin = $16,000). Alternatively, we can calculate this in terms of dollars by using the contribution margin ratio.

As done previously, we can confirm this calculation using the contribution margin income statement:

Note that the example calculations ignored income taxes, which implies we were finding target operating income. However, companies may want to determine what level of sales would generate a desired after-tax profit. To find the break-even point at a desired after-tax profit, we simply need to convert the desired after-tax profit to the desired pre-tax profit, also referred to as operating income, and then follow through as in the example. Suppose Hicks wants to earn $24,000 after-taxes, what level of sales (units and dollars) would be needed to meet that goal? First, the after-tax profit needs to be converted to a pre-tax desired profit:

If the tax rate for Hicks is 40%, then the $24,000 after-tax profit is equal to a pre-tax profit of $40,000:

The tax rate indicates the amount of tax expense that will result from any profits and 1 – tax rate indicates the amount remaining after taking out tax expense. The concept is similar to buying an item on sale. If an item costs $80 and is on sale for 40% off, then the amount being paid for the item is 60% of the sale price, or $48 ($80 × 60%). Another way to find this involves two steps. First find the discount ($80 × 40% = $32) and then subtract the discount from the sales price ($80 – $32 = $48).

Taxes and profit work in a similar fashion. If we know the profit before tax is $100,000 and the tax rate is 30%, then tax expenses are $100,000 × 30% = $30,000. This means the after-tax income is $100,000 – $30,000 = $70,000. However, in most break-even situations, as well as other decision-making areas, the desired after-tax profit is known, and the pre-tax profit must be determined by dividing the after-tax profit by 1 – tax rate.

To demonstrate the combination of both a profit and the after-tax effects and subsequent calculations, let’s return to the Hicks Manufacturing example. Let’s assume that we want to calculate the target volume in units and revenue that Hicks must sell to generate an after-tax return of $24,000, assuming the same fixed costs of $18,000.

Since we earlier determined $24,000 after-tax equals $40,000 before-tax if the tax rate is 40%, we simply use the break-even at a desired profit formula to determine the target sales.

This calculation demonstrates that Hicks would need to sell 725 units at $100 a unit to generate $72,500 in sales to earn $24,000 in after-tax profits.

Alternatively, target sales in sales dollars could have been calculated using the contribution margin ratio:

Once again, the contribution margin income statement proves the sales and profit relationships.

Thus, to calculate break-even point at a particular after-tax income, the only additional step is to convert after-tax income to pre-tax income prior to utilizing the break-even formula. It is good to understand the impact of taxes on break-even analysis as companies will often want to plan based on the after-tax effects of a decision as the after-tax portion of income is the only part of income that will be available for future use.

Application of Break-Even Concepts for a Service Organization

Because break-even analysis is applicable to any business enterprise, we can apply these same principles to a service organization. For example, Marshall & Hirito is a mid-sized accounting firm that provides a wide range of accounting services to its clients but relies heavily on personal income tax preparation for much of its revenue. They have analyzed the cost to the firm associated with preparing these returns. They have determined the following cost structure for the preparation of a standard 1040A Individual Income Tax Return:

They have fixed costs of $14,000 per month associated with the salaries of the accountants who are responsible for preparing the Form 1040A . In order to determine their break-even point, they first determine the contribution margin for the Form 1040A as shown:

Now they can calculate their break-even point:

Remember, this is the break-even point in units (the number of tax returns) but they can also find a break-even point expressed in dollars by using the contribution margin ratio. First, they find the contribution margin ratio. Then, they use the ratio to calculate the break-even point in dollars:

We can confirm these figures by preparing a contribution margin income statement:

Therefore, as long as Marshall & Hirito prepares 56 Form 1040 income tax returns, they will earn no profit but also incur no loss. What if Marshall & Hirito has a target monthly profit of $10,000? They can use the break-even analysis process to determine how many returns they will need to prepare in order to cover their fixed expenses and reach their target profit:

They will need to prepare 96 returns during the month in order to realize a $10,000 profit. Expressing this in dollars instead of units requires that we use the contribution margin ratio as shown:

Marshall & Hirito now knows that, in order to cover the fixed costs associated with this service, they must generate $38,400 in revenue. Once again, let’s verify this by constructing a contribution margin income statement:

As you can see, the $38,400 in revenue will not only cover the $14,000 in fixed costs, but will supply Marshall & Hirito with the $10,000 in profit (net income) they desire.

As you’ve learned, break-even can be calculated using either contribution margin per unit or the contribution margin ratio. Now that you have seen this process, let’s look at an example of these two concepts presented together to illustrate how either method will provide the same financial results.

Suppose that Channing’s Chairs designs, builds, and sells unique ergonomic desk chairs for home and business. Their bestselling chair is the Spine Saver. Figure 3.10 illustrates how Channing could determine the break-even point in sales dollars using either the contribution margin per unit or the contribution margin ratio.

Note that in either scenario, the break-even point is the same in dollars and units, regardless of approach. Thus, you can always find the break-even point (or a desired profit) in units and then convert it to sales by multiplying by the selling price per unit. Alternatively, you can find the break-even point in sales dollars and then find the number of units by dividing by the selling price per unit.

College Creations

College Creations, Inc (CC), builds a loft that is easily adaptable to most dorm rooms or apartments and can be assembled into a variety of configurations. Each loft is sold for $500, and the cost to produce one loft is $300, including all parts and labor. CC has fixed costs of $100,000.

What happens if CC produces nothing?
Now, assume CC produces and sells one unit (loft). What are their financial results?
Now, what do you think would happen if they produced and sold 501 units?
How many units would CC need to sell in order to break even?
How many units would CC need to sell if they wanted to have a pretax profit of $50,000?

A. If they produce nothing, they will still incur fixed costs of $100,000. They will suffer a net loss of $100,000.

B. If they sell one unit, they will have a net loss of $99,800.

C. If they produce 501 units, they will have operating income of $200 as shown:

D. Break-even can be determined by FC/CM per unit: $100,000 ÷ $200 = 500. Five hundred lofts must be sold to break even.

E. The desired profit can be treated like a fixed cost, and the target profit would be (FC + Desired Profit)/CM or ($100,000 + $50,000) ÷ $200 = 750. Seven hundred fifty lofts need to be sold to reach a desired income of $50,000. Another way to have found this is to know that, after fixed costs are met, the $200 per unit contribution margin will go toward profit. The desired profit of $50,000 ÷ $200 per unit contribution margin = 250. This means that 250 additional units must be sold. To break even requires 500 units to be sold, and to reach the desired profit of $50,000 requires an additional 250 units, for a total of 750 units.

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Break-Even Analysis: What It Is and How to Calculate

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A break-even analysis helps business owners find the point at which their total costs and total revenue are equal, also known as the break-even point in accounting . This lets them know how much product they need to sell to cover the cost of doing business.

At the break-even point, you’ve made no profit, but you also haven’t incurred any losses. This metric is important for new businesses to determine if their ideas are viable, as well as for seasoned businesses to identify operational weaknesses.

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What is the break-even analysis formula?

The break-even analysis formula requires three main pieces of information:

Fixed costs per month: Fixed costs are what your business has to pay no matter how many units you sell. This could include rent, business insurance , business loan payments, accounting and legal services and utilities.

Sales price per unit: This is the amount of money you will charge the customer for every single unit of product or service you sell. Make sure to include any discounts or special offers you give customers. If you sell multiple products or services, figure out the average selling price for everything combined.

Variable costs per unit: These are the costs you incur for each unit you sell. They may include labor, the price of raw materials or sales commissions, and they are subject to change as sales fluctuate. To calculate, multiply the number of units produced by the costs of producing just one unit.

From there, the break-even point can be calculated in units.

Break-even point in units = fixed costs / (sales price per unit – variable costs per unit)

This gives you the number of units you need to sell to cover your costs per month. Anything you sell above this number is profit. Anything below this number means your business is losing money.

Once you’re above the break-even point, every additional unit you sell increases profit by the amount of the unit contribution margin. This is the amount each unit contributes to paying off fixed costs and increasing profits, and it’s the denominator of the break-even analysis formula. To find it, subtract variable costs per unit from sales price per unit.

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Break-even analysis example

Let's say you're thinking about starting a furniture manufacturing business. The first unit you're going to sell is a table. How many tables would you need to sell in order to break even?

If it costs $50 to make a table and you have fixed costs of $1,000, the number of tables you must sell to break even varies depending on price. Here are two scenarios:

If you sell a table at $100: $1,000 / ($100 — $50) = 20 tables

If you sell a table at $200: $1,000 / ($200 — $50) = 6.7 tables

This is a great example of how selling a product for a higher price allows you to reach the break-even point significantly faster. However, you need to think about whether your customers would pay $200 for a table, given what your competitors are charging.

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When to use break-even analysis

Break-even analysis formulas can help you compare different pricing strategies.

For example, if you raise the price of a product, you’d have to sell fewer items, but it might be harder to attract buyers. You can lower the price, but would then need to sell more of a product to break even. It can also hint at whether it’s worth using less expensive materials to keep the cost down, or taking out a longer-term business loan to decrease monthly fixed costs.

Here are a few specific situations where a break-even analysis is especially useful:

Starting a new business: When starting a business , break-even analysis can help you figure out the viability of your product or service. If you do this analysis along with writing a business plan, you can spot weak points in your company's financial strategy and develop a plan to address them.

Launching a new product or service: Whenever you launch a new product or service, you'll need to determine its sale price and how much it costs to produce it. Using a break-even analysis, you can see how both of these factors affect your profitability. Eventually, you can choose a price that's fair to customers and realistic for your company.

Adding a new sales channel: If your business model changes to incorporate a new sales channel, that's a good opportunity to do a break-even analysis. For example, if you have a brick-and-mortar store but want to start an e-commerce business, your costs and pricing might change. You should make sure you at least break even so that you don't put too much financial strain on your business.

This article originally appeared on Fundera, a subsidiary of NerdWallet.

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Break-Even Analysis

What Is Break Even Analysis?

Break even analysis is a calculation of the quantity sold which generates enough revenues to equal expenses. In securities trading, the meaning of break even analysis is the point at which gains are equal to losses.

Another definition of break even analysis is the examination and calculation of the margin of safety that’s based on a company’s revenue – as well as the related costs of running the organization.

How Is Break Even Analysis Used?

A break-even analysis helps business owners determine when they'll begin to turn a profit, which can help them better price their products. Usually, management uses this metric to help guide strategic decisions to grow/maintain the business.

Break-Even Analysis vs. Break-Even Point

Break-even analysis uses a calculation called the break even point (BEP) which provides a dynamic overview of the relationships among revenues, costs, and profits. More specifically, it looks at a company’s fixed costs in relation to profits that are earned from each unit sold.

Break Even Analysis Varies Among Industries

Typical variable and fixed costs differ widely among industries. This is why comparison of break-even points is generally most meaningful among companies within the same industry. The definition of a 'high' or 'low' break-even point should be made within this context.

Break Even Analysis Formula

Fixed Costs

Fixed costs do not change with the quantity of output. In other words, they’re not affected by sales. Examples include rent and insurance premiums, as well as fees paid for marketing or loan payments.

Variable Costs

Variable costs change depending on the amount of output. Examples include raw materials and labor that are directly involved in a company's manufacturing process.

Contribution Margin

The contribution margin is the amount remaining (i.e. the excess) after total variable costs are deducted from a product’s selling price.

Say that an item sells for $5,000 and your total variable costs are $3,000 per unit. Your contribution margin would be $2,000 (after subtracting $3,000 from $5,000). This is the revenue that’ll be used to cover your fixed costs – which isn’t considered when calculating the contribution margin.

Earned Profit

Earned profit is the amount a business earns after taking into account all expenses. You can calculate this number by subtracting the costs that go into your company’s operations from your sales.

Example of Break Even Analysis

In this break even analysis sample, Restaurant ABC only sells pepperoni pizza. Its variable expenses for each pizza include:

Flour: $0.50

Yeast: $0.05

Water: $0.01

Cheese: $3.00

Pepperoni: $2.00

Adding all of these costs together, we determine that it has $5.56 in variable costs per pizza. Based on the total variable expenses per pizza, Restaurant ABC must price its pizzas at $5.56 or higher to cover those costs.

The fixed expenses per month include:

Labor: $1,500

Rent: $3,000

Insurance: $200

Advertising: $500

Utilities: $450

In total, Restaurant ABC's fixed costs are $5,650.

Let’s say that each pizza is sold for $10.00. Therefore the contribution margin is $4.44 ($10.00 - $5.56).

To determine the number of pizzas (or units) Restaurant ABC needs to sell, take its fixed costs and divide them by the contribution margin:

$5,650 ÷ $4.44 = 1,272.5

This means the restaurant needs to sell at least 1,272.53 pizzas (rounded up to 1,273 whole pizzas), to cover its monthly fixed costs. Or, the restaurant needs to have at least $12,730 in sales (1,272.5 x $10) to reach the break-even point.

Note: If your product must be sold as whole units, you should always round up to find the break-even point.

Remember: Fixed Costs Can Increase

Some fixed costs increase after a certain level of revenue is reached. For example, if Restaurant ABC begins selling 5,000 pizzas per month – rather than 2,000 – it might need to hire a second manager, thus increasing labor costs.

Break-Even Analysis Benefits

Break-even analysis is a great way to determine a business’ profitability. It can show business owners and management how many units need to be sold in order to cover both fixed and variable expenses. It also provides a specific benchmark or goal so businesses not only survive but also remain profitable.

Calculating Break Even Analysis in Excel

Excel users can utilize Goal Seek (a tool that’s built into the program) to calculate a break-even rate. To do this, you’ll need to have an Excel break-even calculator set up:

Step 1: Find Goal Seek

calculate-break-even-analysis-in-excel-step-1

Step 2: Enter Your Numbers Into the Break Even Point

In the inputs, enter:

Set Cell = Contribution Margin Per Unit($I$12);

To Value = 0;

By Changing Sells = $B$30 i.e. How many units do you want to sell (see blue arrows).

calculate-break-even-analysis-in-excel-step-2

Step 3: Review the Number of Units Required to Break Even

Excel will automatically populate the required number of units to ensure that Contribution Margin is $0.

calculate-break-even-analysis-in-excel-step 3

Optional: Create A Scenario Simulator for Multiple Units of Sale

If you want to see profitability based on many sales figures, then a scenario simulator may be helpful.

To do this, In Excel, go to: DATA → What-if Scenario → Scenario Manager. Here, you can input multiple scenarios with different sales units.

IA has recreated 3 scenarios as a starting point（Recession = 1000 Units; Normal = 1500 Units; Boom= 2000 Units)

Create-a-scenario-simulator-for-multiple-units-of-sale

Excel will then ask you to enter how many units you want this scenario to contain. In this instance, it is 3000 units. Click “Ok.”

Create-a-scenario-simulator-for-multiple-units-of-sale-step-3

If you click on a scenario and click “SHOW,” Excel will automatically update the expected sales figure and calculate the contribution margin. In the following screenshot, the chosen Example scenario has 3000 units:

Create-a-scenario-simulator-for-multiple-units-of-sale-step-4

To view all your scenarios simultaneously, click on “Summary.” Excel will ask you which resulting cell you want to see. In order to see “Contribution Margin Per Unit,” our example set that to cell $I$12 and Excel inserted a new tab which shows the scenarios ($B$30 is our units of expected sale) plus the associated Contribution Margin Per Unit ($I1$12).

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10.6 Breakeven Analysis

Learning objective.

Learn how to use breakeven analysis to estimate the number of sales units at which net income is zero.

Forecasting sales of shoes has started you thinking. Selling twelve thousand pair of shoes the first year you run the business sounds great, but you still need to find an answer to the all-important question: are there enough customers willing to buy my jogging shoes at a price that will allow me to make a profit? Is there some way to figure out the level of sales I would need to avoid losing money—to “break even”? Fortunately, an accountant friend of yours informs you that there is. Not surprisingly, it’s called breakeven analysis , and here’s how it works: to break even (have no profit or loss), total sales revenue must exactly equal all your expenses (both variable and fixed) . To determine the level of sales at which this will occur, you need to do the following:

Fixed costs = $210,000 salaries + $60,000 rent + $10,000 advertising + $8,000 insurance + 12,000 other fixed costs = $300,000
Variable cost per unit = $40 (cost of each pair of shoes) + $5 sales commission = $45
Contribution margin per unit = $80 selling price minus $45 variable cost per unit = $35
Breakeven in units = $300,000 fixed costs ÷ $35 contribution margin per unit = 8,571 units

Your calculation means that if you sell 8,571 pairs of shoes, you will end up with zero profit (or loss) and will exactly break even.

If your sales estimate is realistic (a big “if”), then you should be optimistic about starting the business. All your fixed costs will be covered once you sell 8,571 pairs of shoes. Any sales above that level will be pure profit. So, if you sell your expected level of twelve thousand pairs of shoes, you’ll make a profit of $120,015 for the first year. Here’s how we calculated that profit:

12,000 expected sales level – 8,571 breakeven sales level = 3,429 units × $35 contribution margin per unit = $120,015 first-year profit

As you can see, breakeven analysis is pretty handy. It allows you to determine the level of sales that you must reach to avoid losing money and the profit you’ll make if you reach a higher sales goal. Such information will help you plan for your business.

Key Takeaways

Breakeven analysis is a method of determining the level of sales at which the company will break even (have no profit or loss).
The following information is used in calculating the breakeven point: fixed costs, variable costs, and contribution margin per unit.
Fixed costs are costs that don’t change when the amount of goods sold changes. For example, rent is a fixed cost.
Variable costs are costs that vary, in total, as the quantity of goods sold changes but stay constant on a per-unit basis. For example, sales commissions paid based on unit sales are a variable cost.
Contribution margin per unit is the excess revenue per unit over the variable cost per unit.
The breakeven point in units is calculated with this formula: fixed costs divided by contribution margin per unit (selling price per unit less variable cost per unit).

(AACSB) Analysis

For the past ten years, you’ve worked at a PETCO Salon as a dog groomer. You’re thinking of starting your own dog grooming business. You found a place you could rent that’s right next to a popular shopping center, and two of your friends (who are also dog groomers) have agreed to work for you. The problem is that you need to borrow money to start the business and your banker has asked for a breakeven analysis. You have prepared the following cost estimates for your first year of operations:

Fixed Costs
Salaries	$105,000
Rent and utilities	$36,000
Advertising	$2,000
Equipment	$3,000

Variable Cost per Dog
Shampoo	$2.00
Coat conditioner	$1.50
Pet cologne	$0.75
Dog treats	$1.25
Hair ribbons	$0.50

You went online and researched grooming prices in your area. Based on your review, you have decided to charge $32 for each grooming.

What’s the breakeven point in units—how many dogs will you need to groom in the first year to break even?
If you and your two employees groomed dogs five days a week, seven hours a day, fifty weeks a year, how many dogs would each of you need to groom each day? Is this realistic given that it takes one hour to groom a dog?
If you raised your grooming fee to $38, how many dogs would you need to groom to break even?
At this new price, how many dogs will each of you have to groom each day (assuming, again, that the three of you groom dogs fifty weeks a year, five days a week, seven hours a day)?
Would you start this business?
What price would you charge to groom a dog?
How could you lower the breakeven point and make the business more profitable?

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Module: Accounting and Finance

The break-even point, break-even analysis in three minutes.

When can you say a business is good or not? Watch the following video to find out.

Line graph showing the point where the sales revenue equals the total costs

A company breaks even for a given period when sales revenue and costs incurred during that period are equal. Thus the break-even point is that level of operations at which a company realizes no net income or loss.

A company may express a break-even point in dollars of sales revenue or number of units produced or sold. No matter how a company expresses its break-even point, it is still the point of zero income or loss.

In order to grasp the concept of breakeven, it’s important to understand that all costs are not created equal: Some are fixed, and some are variable. Fixed Costs are expenses that are not dependent on the amount of goods or services produced by the business. They are things such as salaries or rents paid per month. If you own a car, then your car payment and insurance premiums are fixed costs because you pay them every month whether you drive your car or not. Variable Costs are volume related and are paid per quantity or unit produced. For your car, your variable costs are things like gas, maintenance, or tires because you only incur these costs when you drive your car. The more miles you drive, the more your gas expenses go up—such costs vary with the level of activity.

Before we turn to the calculation of the break-even point, it’s also important to understand contribution margin.

Contribution Margin

Contribution margin is the portion of revenue that is not consumed by variable cost. In a simple example, if you were to buy a candy bar for 75 cents and resell it for $1, then the contribution margin would be 25 cents—the amount not consumed by cost.

Of course, in business this is generally more complicated. It requires you to understand the variable costs for an item, or those costs that are directly tied to producing a new unit. When selling lemonade from a stand, the costs of the water, lemon juice, sweetener, ice, and serving glass are all variable costs that will recur with each item sold. The cost of the stand is a fixed cost. The labor required to make and serve the lemonade is also generally a fixed cost, as it doesn’t vary based on the number of glasses sold. Let’s look at this in numeric terms, as follows:


Lemons, sweetener, ice, and water	20 cents per glass	Variable
Glasses	5 cents each	Variable
Labor	$100 per day per employee	Fixed
Lemonade stand rental	$2,000 per month	Fixed

If we know that the stand sells 1,000 glasses of lemonade each day at $3 per glass, and that one employee can make and serve 1,000 glasses, then we can calculate the contribution margin.

The cost of raw materials is 25 cents per glass (20 for ingredients + 5 for the glass). If the lemonade is sold for $3 per glass, then the contribution margin is $2.75 per glass.

It’s important to know the contribution margin in order to calculate what portion of the revenue from a product is consumed by the variable costs and what portion can be used to cover, or contribute to, fixed costs.

Breakeven in Units

To illustrate the calculation of a break-even point in units, Video Productions produces videotapes selling for USD 20 per unit. Fixed costs per period total USD 40,000, while the variable cost is USD 12 per unit.

We compute the break-even point in units by dividing total fixed costs by the contribution margin per unit. The contribution margin per unit is USD 8 (USD 20 selling price per unit – USD 12 variable cost per unit). In the following break-even equation, BE refers to the break-even point:

[latex]\displaystyle\text{BE units} = \frac{\text{Fixed costs}}{\text{Contribution margin per unit}} [/latex] [latex]\displaystyle\text{BE units} = \frac{\text{USD 40,000}}{\text{USD 8 per unit}} [/latex] [latex]\displaystyle\text{BE units} = \text{5,000 units} [/latex]

The result tells us that Video Productions breaks even at a volume of 5,000 units per month. We can prove that to be true by computing the revenue and total costs at a volume of 5,000 units. Revenue = 5,000 units X USD 20 sales price per unit = USD 100,000. Total costs = USD 100,000 = USD 40,000 fixed costs + USD 60,000 variable costs (USD 60,000 = USD 12 per unit X 5,000 units).

Note that the revenue and total cost lines cross at 5,000 units—the break-even point. Video Productions has net income at volumes greater than 5,000, but it has losses at volumes less than 5,000 units.

Breakeven in Sales Dollars

Companies frequently measure volume in terms of sales dollars instead of units. For a company such as General Motors that makes not only automobiles but also small components sold to other manufacturers and industries, it makes no sense to think of a break-even point in units. General Motors evaluates breakeven in sales dollars.

The formula to compute the break-even point in sales dollars looks a lot like the formula to compute the breakeven in units, except we divide fixed costs by the contribution margin ratio instead of the contribution margin per unit.

[latex]\displaystyle\text{BE units} = \frac{\text{Fixed costs}}{\text{Contribution margin ratio}} [/latex]

A Broader Perspective: Even Colleges Use Breakeven

The dean of the business school at a particular university was considering whether to offer a seminar for executives. The tuition would be USD 650 per person. Variable costs, including meals, parking, and materials, would be USD 80 per person. Certain costs of offering the seminar, including advertising, instructors’ fees, room rent, and audiovisual equipment rent, would not be affected by the number of people attending. Such seminar costs, which could be thought of as fixed costs, amounted to USD 8,000.

In addition to these costs, a number of staff, including the dean, would work on the program. Although the salaries paid to these staff were not affected by offering the seminar, working on it took these people away from other duties, thus creating an opportunity cost, estimated to be USD 7,000 for this seminar.

Given this information, the school estimated the break-even point to be (USD 8,000 + USD 7,000)/(USD 650 – USD 80) = 26.3 students. If the school wanted at least to break even on this program, it should offer the program only if it expected at least 27 students to attend.

Contribution Margin Ratio

The contribution margin ratio expresses the contribution margin as a percentage of sales. To calculate this ratio, divide the contribution margin per unit by the selling price per unit, or total contribution margin by total revenues. Video Production’s contribution margin ratio is:

[latex]\displaystyle\text{Contribution margin ratio} = \frac{\text{Contribution margin per unit}}{\text{Selling price per unit}} [/latex]

[latex]\displaystyle\frac{\text{USD 20}-\text{USD 12}}{\text{USD 20}} = \frac{\text{USD 8}}{\text{USD 20}} = 0.40 [/latex]

Supposing that Video Productions had a total contribution margin of USD 48,000 on revenues of USD 120,000, we compute the contribution margin ratio as follows:

[latex]\displaystyle\text{Contribution margin ratio} = \frac{\text{Total contribution margin}}{\text{Total revenues}} [/latex]

[latex]\displaystyle\frac{\text{USD 48,000}}{\text{USD 120,000}} = 0.40 [/latex]

That is, for each dollar of sales, there is a USD 0.40 contribution to covering fixed costs and generating net income.

Using this ratio, we calculate Video Production’s break-even point in sales dollars as:

[latex]\displaystyle\text{BE dollars} = \frac{\text{Fixed costs}}{\text{Contribution margin rate}} [/latex]

[latex]\displaystyle\text{BE dollars} = \frac{\text{USD 40,000}}{0.40} =\text{USD 100,000} [/latex]

The break-even volume of sales is USD 100,000 (5,000 units at USD 20 per unit). At this level of sales, fixed costs plus variable costs equal sales revenue.

In a period of complete idleness (no units produced), Video Productions would lose USD 40,000 (the amount of fixed costs). However, when Video Productions has an output of 10,000 units, the company has net income of USD 40,000.

Although you are likely to use break-even analysis for a single product, you will more frequently use it in multi-product situations. The easiest way to use break-even analysis for a multi-product company is to use dollars of sales as the volume measure. For break-even analysis purposes, a multi-product company must assume a given product mix. Product mix refers to the proportion of the company’s total sales attributable to each type of product sold.

To illustrate the computation of the break-even point for Wonderfood, a multi-product company that makes three types of cereal, assume the following historical data:




Sales	$60,000	100%	$30,000	100%	$10,000	100%	$100,000	100%
Less:
Variable costs	40,000	67%	16,000	53%	4,000	40%	60,000	60%
Contribution margin	$20,000	33%	$14,000	47%	$ 6,000	60%	$ 40,000	40%

We use the data in the total columns to compute the break-even point. The contribution margin ratio is 40 percent or (USD 40,000/USD 100,000). Assuming the product mix remains constant and fixed costs for the company are USD 50,000, break-even sales are USD 125,000, computed as follows:

[latex]\displaystyle\text{BE dollars} = \frac{\text{Fixed costs}}{\text{Contribution margin ratio}} [/latex] [latex]\displaystyle\text{BE dollars} = \frac{\text{USD 50,000}}{0.40} = \text{USD 125,000} [/latex]

[To check our answer: (USD 125,000 X 0.40) – USD 50,000 = USD 0.]

To find the three product sales totals, we multiply total sales dollars by the percent of product mix for each of the three products. The product mix for products 1, 2, and 3 is 60:30:10, respectively. That is, out of the USD 100,000 total sales, there were sales of USD 60,000 for product 1, USD 30,000 for product 2, and USD 10,000 for product 3. Therefore, the company has to sell USD 75,000 of product 1 (0.6 X USD 125,000), USD 37,500 of product 2 (0.3 X USD 125,000), and USD 12,500 of product 3 (0.1 X USD 125,000) to break even.

An Accounting Perspective: Business Insight

The founder of Domino’s Pizza, Inc. nearly went bankrupt several times before he finally made Domino’s a financial success. One early problem was that the company was providing small pizzas that cost almost as much to make and just as much to deliver as larger pizzas. Because they were small, the company could not charge enough to cover its costs. At one point, the company’s founder was so busy producing small pizzas that he did not have time to determine that the company was losing money on them.

Margin of Safety

If a company’s current sales are more than its break-even point, it has a margin of safety equal to current sales minus break-even sales. The margin of safety is the amount by which sales can decrease before the company incurs a loss. For example, assume Video Productions currently has sales of USD 120,000 and its break-even sales are USD 100,000. The margin of safety is USD 20,000, computed as follows:

Margin safety = Current sales – Break-even sales

= USD 120,000 – USD 100,000

= USD 20,000

Sometimes people express the margin of safety as a percentage, called the margin of safety rate. The margin of safety rate is equal to [latex]\displaystyle\frac{\text{(Current sales} - \text{Break-even sales)}}{\text{Current sales}} [/latex]. Using the data just presented, we compute the margin of safety rate as follows:

Margin of safety rate = [latex]\displaystyle\frac{\text{(Current sales} - \text{Break-even sales)}}{\text{Current sales}} [/latex]

[latex]\displaystyle\frac{\text{(USD 120,000} - \text{USD 100,000)}}{\text{USD 120,000}} = 16.67 \text{percent} [/latex]

This means that sales volume could drop by 16.67 percent before the company would incur a loss.

Try It: The Rise of the Business Guru

Play the simulation below multiple times to see how different choices lead to different outcomes. All simulations allow unlimited attempts so that you can gain experience applying the concepts.

Check Your Understanding

Answer the question(s) below to see how well you understand the topics covered above. This short quiz does not count toward your grade in the class, and you can retake it an unlimited number of times.

Use this quiz to check your understanding and decide whether to (1) study the previous section further or (2) move on to the next section.

Contribution Margin. Provided by : Lumen Learning. License : CC BY: Attribution
The Rise of the Business Guru. Authored by : Clark Aldrich for Lumen Learning. License : CC BY: Attribution
Check Your Understanding. Authored by : Lumen Learning. License : CC BY: Attribution
Finding the Break-Even Point. Authored by : Roger H. Hermanson, James Don Edwards, Michael W. Maher, John Ivanevich. Provided by : Saylor . Located at : http://www.saylor.org/site/wp-content/uploads/2012/09/TBQ_PA_Accounting_managerial.pdf . License : CC BY-NC-SA: Attribution-NonCommercial-ShareAlike
3 Minutes! Break Even Analysis Explained for CVP Cost Volume Profit Analysis. Authored by : MBAbullshitDotCom. Located at : https://youtu.be/LDEyu1TR0Rs . License : All Rights Reserved . License Terms : Standard YouTube License

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7.2 Breakeven Analysis

The break-even point is the dollar amount (total sales dollars) or production level (total units produced) at which the company has recovered all variable and fixed costs. In other words, no profit or loss occurs at break-even because Total Cost = Total Revenue. Figure 7.15 illustrates the components of the break-even point:

A graph of the Break-Even Point where “Dollars” is the y axis and “Units Sold” is the x axis.

The basic theory illustrated in Figure 7.15 is that, because of the existence of fixed costs in most production processes, in the first stages of production and subsequent sale of the products, the company will realize a loss. For example, assume that in an extreme case the company has fixed costs of $20,000, a sales price of $400 per unit and variable costs of $250 per unit, and it sells no units. It would realize a loss of $20,000 (the fixed costs) since it recognized no revenue or variable costs. This loss explains why the company’s cost graph recognized costs (in this example, $20,000) even though there were no sales. If it subsequently sells units, the loss would be reduced by $150 (the contribution margin) for each unit sold. This relationship will be continued until we reach the break-even point, where total revenue equals total costs. Once we reach the break-even point for each unit sold the company will realize an increase in profits of $150.

To illustrate the concept of break-even, we will return to Hicks Manufacturing and look at the Blue Jay birdbath they manufacture and sell.

Sales Where Operating Income Is $0

Hicks Manufacturing Blue Jay Model: Sales Price per Unit $100 less Variable Cost per unit 20 equals Contribution Margin per Unit $80.

Break-Even Point in Units: Total Fixed Costs divided by Contribution Margin per Unit equals $18,000 divided by $80 equals 225 units.

Applying this to Hicks calculates as:

Hicks Manufacturing Contribution Margin Income Statement: Sales (225 units at $100 per unit) $22,500 less Variable Cost (225 units at $20 per unit) 4,500 equals Contribution Margin 18,000. Subtract Fixed Costs 18,000 equals Operating Income of $0.

The break-even point for Hicks Manufacturing at a sales volume of $22,500 (225 units) is shown graphically in Figure 7.19 .

A graph of the Break-Even Point where “Dollars” is the y axis and “Birdbaths Sold” is the x axis.

Sales Where Operating Income Is Negative

Hicks Manufacturing Contribution Margin Income Statement: Sales (175 units at $100 per unit) $17,500 less Variable Cost (175 units at $20 per unit) 3,500 equals Contribution Margin 14,000. Subtract Fixed Costs 18,000 equals Operating Income of $(4,000).

At 175 units ($17,500 in sales), Hicks does not generate enough sales revenue to cover their fixed expenses and they suffer a loss of $4,000. They did not reach the break-even point of 225 units.

Sales Where Operating Income Is Positive

Hicks Manufacturing Contribution Margin Income Statement: Sales (300 units at $100 per unit) $30,000 less Variable Cost (300 units at $20 per unit) 6,000 equals Contribution Margin 24,000. Subtract Fixed Costs 18,000 equals Operating Income of $6,000.

Again, looking at the graph for break-even ( Figure 7.23 ), you will see that their sales have moved them beyond the point where total revenue is equal to total cost and into the profit area of the graph.

Hicks Manufacturing can use the information from these different scenarios to inform many of their decisions about operations, such as sales goals.

However, using the contribution margin per unit is not the only way to determine a break-even point. Recall that we were able to determine a contribution margin expressed in dollars by finding the contribution margin ratio. We can apply that contribution margin ratio to the break-even analysis to determine the break-even point in dollars. For example, we know that Hicks had $18,000 in fixed costs and a contribution margin ratio of 80% for the Blue Jay model. We will use this ratio ( Figure 7.24 ) to calculate the break-even point in dollars.

Break-Even Point in Dollars equals Fixed Costs divided by Contribution Margin ratio equals $18,000 divided by 0.80 equals $22,500.

Applying the formula to Hicks gives this calculation:

By knowing at what level sales are sufficient to cover fixed expenses is critical, but companies want to be able to make a profit and can use this break-even analysis to help them.

Examples of the Effects of Variable and Fixed Costs in Determining the Break-Even Point

If Hicks wants to earn $16,000 in profit in the month of May, we can calculate their new break-even point as follows:

As done previously, we can confirm this calculation using the contribution margin income statement:

Sales (425 units at $100 per unit) $42,500 less Variable Cost (425 units at $20 per unit) 8,500 equals Contribution Margin 34,000. Subtract Fixed Costs 18,000 equals Operating Income of $16,000.

If the tax rate for Hicks is 40%, then the $24,000 after-tax profit is equal to a pre-tax profit of $40,000:

Since we earlier determined $24,000 after-tax equals $40,000 before-tax if the tax rate is 40%, we simply use the break-even at a desired profit formula to determine the target sales.

This calculation demonstrates that Hicks would need to sell 725 units at $100 a unit to generate $72,500 in sales to earn $24,000 in after-tax profits.

Alternatively, target sales in sales dollars could have been calculated using the contribution margin ratio:

Once again, the contribution margin income statement proves the sales and profit relationships.

Application of Break-Even Concepts for a Service Organization

Charge to client (sales price per return) $400, Variable cost per return 150.

Sales price per return $400, Variable cost per return $150, Contribution margin per return $250.

Now they can calculate their break-even point:

We can confirm these figures by preparing a contribution margin income statement:

Marshall & Son, CPAs, Contribution Margin Income Statement, Sales (56 at $400 per return) $22,400 less Variable Costs (56 at $150 per return) 8,400 equals Contribution Margin 14,000. Subtract Fixed Costs 14,000 equals Operating Income of $0.

They will need to prepare 96 returns during the month in order to realize a $10,000 profit. Expressing this in dollars instead of units requires that we use the contribution margin ratio as shown:

Marshall & Son, CPAs, Contribution Margin Income Statement, Sales (96 at $400 per return) $38,400 less Variable Costs (96 at $150 per return) 14,400 equals Contribution Margin 24,000. Subtract Fixed Costs 14,000 equals Operating Income of $10,000.

As you can see, the $38,400 in revenue will not only cover the $14,000 in fixed costs, but will supply Marshall & Hirito with the $10,000 in profit (net income) they desire.

Suppose that Channing’s Chairs designs, builds, and sells unique ergonomic desk chairs for home and business. Their bestselling chair is the Spine Saver. Figure 7.32 illustrates how Channing could determine the break-even point in sales dollars using either the contribution margin per unit or the contribution margin ratio.

how Channing could determine the break-even point in sales dollars

College Creations

What happens if CC produces nothing?
Now, assume CC produces and sells one unit (loft). What are their financial results?
Now, what do you think would happen if they produced and sold 501 units?
How many units would CC need to sell in order to break even?
How many units would CC need to sell if they wanted to have a pretax profit of $50,000?

A. If they produce nothing, they will still incur fixed costs of $100,000. They will suffer a net loss of $100,000.

B. If they sell one unit, they will have a net loss of $99,800.

Sales Revenue $500 less Cost per Unit 300 equals Contribution Margin 200. Subtract 100,000 Fixed Costs to get Operating Loss of $(99,800).

C. If they produce 501 units, they will have operating income of $200 as shown:

Sales Revenue (501 Units at $500) $250,500 less Cost per Unit (501 units at $300) 150,300 equals Contribution Margin 100,200. Subtract 100,000 Fixed Costs to get Operating Income of $200.

D. Break-even can be determined by FC ÷ CM per unit: $100,000 ÷ $200 = 500. Five hundred lofts must be sold to break even.

E. The desired profit can be treated like a fixed cost, and the target profit would be (FC + Desired Profit) ÷ CM or ($100,000 + $50,000) ÷ $200 = 750. Seven hundred fifty lofts need to be sold to reach a desired income of $50,000. Another way to have found this is to know that, after fixed costs are met, the $200 per unit contribution margin will go toward profit. The desired profit of $50,000 ÷ $200 per unit contribution margin = 250. This means that 250 additional units must be sold. To break even requires 500 units to be sold, and to reach the desired profit of $50,000 requires an additional 250 units, for a total of 750 units.

The Effects on Break-Even under Changing Business Conditions

Circumstances often change within a company, within an industry, or even within the economy that impact the decision-making of an organization. Sometimes, these effects are sudden and unexpected, for example, if a hurricane destroyed the factory of a company’s major supplier; other times, they occur more slowly, such as when union negotiations affect your labor costs. In either of these situations, costs to the company will be affected. Using CVP analysis, the company can predict how these changes will affect profits.

Changing a Single Variable

To demonstrate the effects of changing any one of these variables, consider Back Door Café, a small coffee shop that roasts its own beans to make espresso drinks and gourmet coffee. They also sell a variety of baked goods and T-shirts with their logo on them. They track their costs carefully and use CVP analysis to make sure that their sales cover their fixed costs and provide a reasonable level of profit for the owners.

Change in Sales Price

The owner of Back Door has one of her employees conduct a survey of the other coffee shops in the area and finds that they are charging $0.75 more for espresso drinks. As a result, the owner wants to determine what would happen to operating income if she increased her price by just $0.50 and sales remained constant, so she performs the following analysis:

The only variable that has changed is the $0.50 increase in the price of their espresso drinks, but the net operating income will increase by $750. Another way to think of this increase in income is that, if the sales price increases by $0.50 per expresso drink and the estimated sales are 1,500 units, then this will result in an increase in overall contribution margin of $750. Moreover, since all of the fixed costs were met by the lower sales price, all of this $750 goes to profit. Again, this is assuming the higher sales price does not decrease the number of units sold. Since the other coffee shops will still be priced higher than Back Door, the owner believes that there will not be a decrease in sales volume.

When making this adjustment to their sales price, Back Door Café is engaging in target pricing , a process in which a company uses market analysis and production information to determine the maximum price customers are willing to pay for a good or service in addition to the markup percentage. If the good can be produced at a cost that allows both the desired profit percentage as well as deliver the good at a price acceptable to the customer, then the company should proceed with the product; otherwise, the company will not achieve its desired profit goals.

Change in Variable Cost

In March, the owner of Back Door receives a letter from her cups supplier informing her that there is a $0.05 price increase due to higher material prices. Assume that the example uses the original $3.75 per unit sales price. The owner wants to know what would happen to net operating income if she absorbs the cost increase, so she performs the following analysis:

She is surprised to see that just a $0.05 increase in variable costs (cups) will reduce her net income by $75. The owner may decide that she is fine with the lower income, but if she wants to maintain her income, she will need to find a new cup supplier, reduce other costs, or pass the price increase on to her customers. Because the increase in the cost of the cups was a variable cost, the impact on net income can be seen by taking the increase in cost per unit, $0.05, and multiplying that by the units expected to be sold, 1,500, to see the impact on the contribution margin, which in this case would be a decrease of $75. This also means a decrease in net income of $75.

Change in Fixed Cost

Back Door Café’s lease is coming up for renewal. The owner calls the landlord to indicate that she wants to renew her lease for another 5 years. The landlord is happy to hear she will continue renting from him but informs her that the rent will increase $225 per month. She is not certain that she can afford an additional $225 per month and tells him she needs to look at her numbers and will call him back. She pulls out her CVP spreadsheet and adjusts her monthly fixed costs upwards by $225. Assume that the example uses the original $3.75 per unit sales price. The results of her analysis of the impact of the rent increase on her annual net income are:

Because the rent increase is a change in a fixed cost, the contribution margin per unit remains the same. However, the break-even point in both units and dollars increase because more units of contribution are needed to cover the $225 monthly increase in fixed costs. If the owner of the Back Door agrees to the increase in rent for the new lease, she will likely look for ways to increase the contribution margin per unit to offset this increase in fixed costs.

In each of the prior examples, only one variable was changed—sales volume, variable costs, or fixed costs. There are some generalizations that can be made regarding how a change in any one of these variables affects the break-even point. These generalizations are summarized in Table 7.1.

Table 7.1 Generalizations Regarding Changes in Break-Even Point from a Change in One Variable By: Rice University
Condition	Result
Sales Price Increases	Break-Even Point Decreases (Contribution Margin is Higher, Need Fewer Sales to Break Even)
Sales Price Decreases	Break-Even Point Increases (Contribution Margin is Lower, Need More Sales to Break Even)
Variable Costs Increase	Break-Even Point Increases (Contribution Margin is Lower, Need More Sales to Break Even)
Variable Costs Decrease	Break-Even Point Decreases (Contribution Margin is Higher, Need Fewer Sales to Break Even)
Fixed Costs Increase	Break-Even Point Increases (Contribution Margin Does Not Change, but Need More Sales to Meet Fixed Costs)
Fixed Costs Decrease	Break-Even Point Decreases (Contribution Margin Does Not Change, but Need Fewer Sales to Meet Fixed Costs)

Changing Multiple Variables

We have analyzed situations in which one variable changes, but often, more than one change will occur at a time. For example, a company may need to lower its selling price to compete, but they may also be able to lower certain variable costs by switching suppliers.

Suppose Back Door Café has the opportunity to purchase a new espresso machine that will reduce the amount of coffee beans required for an espresso drink by putting the beans under higher pressure. The new machine will cost $15,000, but it will decrease the variable cost per cup by $0.05. The owner wants to see what the effect will be on the net operating income and break-even point if she purchases the new machine. She has arranged financing for the new machine and the monthly payment will increase her fixed costs by $400 per month. When she conducts this analysis, she gets the following results:

Variable Cost and Fixed Cost Change Analysis: With Current Price, With Decreased VC and Increased FC (respectively)

Looking at the “what-if” analysis, we see that the contribution margin per unit increases because of the $0.05 reduction in variable cost per unit. As a result, she has a higher total contribution margin available to cover fixed expenses. This is good, because the monthly payment on the espresso machine represents an increased fixed cost. Even though the contribution margin ratio increases, it is not enough to totally offset the increase in fixed costs, and her monthly break-even point has risen from $4,125.00 to $4,687.50. If the new break-even point in units is a realistic number (within the relevant range), then she would decide to purchase the new machine because, once it has been paid for, her break-even point will fall and her net income will rise. Performing this analysis is an effective way for managers and business owners to look into the future, so to speak, and see what impact business decisions will have on their financial position.

Let’s look at another option the owner of the Back Door Café has to consider when making the decision about this new machine. What would happen if she purchased the new machine to realize the variable cost savings and also raised her price by just $0.20? She feels confident that such a small price increase will go virtually unnoticed by her customers but may help her offset the increase in fixed costs. She runs the analysis as follows:

Selling Price, Variable Cost, and Fixed Cost Change Analysis

The analysis shows the expected result: an increase in the per-unit contribution margin, a decrease in the break-even point, and an increase in the net operating income. She has changed three variables in her costs—sales price, variable cost, and fixed cost. In fact, the small price increase almost gets her back to the net operating income she realized before the purchase of the new expresso machine.

By now, you should begin to understand why CVP analysis is such a powerful tool. The owner of Back Door Café can run an unlimited number of these what-if scenarios until she meets the financial goals for her company. There are very few tools in managerial accounting as powerful and meaningful as a cost-volume-profit analysis.

Long Descriptions

A graph of the Break-Even Point where “Dollars” is the y axis and “Units Sold” is the x axis. A line goes from the origin up and to the right and is labeled “Total Revenue.” Another line, labeled “Total Costs” goes up and to the right, starting at the y axis above the origin and is not as steep as the first line. There is a point where the two lines cross labeled “Break-Even Point.” The space between the lines to the left of that point is colored in and labeled “Loss.” The space between the lines to the right of that point is colored in and labeled “Profit.” Return

A graph of the Break-Even Point where “Dollars” is the y axis and “Birdbaths Sold” is the x axis. A line goes from the origin up and to the right and is labeled “Sales.” Another line, representing “Total Costs” goes up and to the right, starting at the y axis at $18,000 and is not as steep as the first line. There is a point where the two lines cross labeled “Break-Even Point.” There are dotted lines going at right angles from the breakeven point to both axes, showing the units sold are 225 and the cost is $22,500. The space between the lines to the left of that point is colored in and labeled “Loss.” The space between the lines to the right of that point is colored in and labeled “Profit.” Return

A graph of the Break-Even Point where “Dollars” is the y axis and “Birdbaths Sold” is the x axis. A line goes from the origin up and to the right and is labeled “Sales.” Another line, representing “Total Costs” goes up and to the right, starting at the y axis at $18,000 and is not as steep as the first line. There is a point where the two lines cross labeled “Break-Even Point.” There are dotted lines going at right angles from the breakeven point to both axes showing the units sold are 225 and the cost is $22,500. There is also a dotted line at the point at 175 units level going up to the sales and costs lines with a point on each. A dotted line from each is going to the y axis crossing at $21,500 from the cost line and $17,500 from the sales line. The difference between these two points is the $4,000 loss. Return

A graph of the Break-Even Point where “Dollars” is the y axis and “Birdbaths Sold” is the x axis. A line goes from the origin up and to the right and is labeled “Sales.” Another line, representing “Total Costs” goes up and to the right, starting at the y axis at $18,000 and is not as steep as the first line. There is a point where the two lines cross labeled “Break-Even Point.” There are dotted lines going at right angles from the breakeven point to both axes showing the units sold are 225 and the cost is $22,500. There is also a dotted line going up from the units x axis at 300 units to both the cost and the sales lines. The points at which they cross have a dotted line going to the Y axis crossing at $24,000 from the cost point and $28,500 from the sales point. The difference between these two points represents the $6,000 profit. Return

Sales and profit relationships. Sales of 725 units × $100 per unit = $72,500, and variable costs of 725 units × $20 per unit = (14,500) for a contribution margin of $58,000. Fixed costs are (18,000), pre-tax profit is $40,000, and income tax expense of 40% is (16,000) for an after-tax profit of $24,000. Return

Sales Price per Unit $1,250, Cost per Unit $850, Contribution Margin per Unit $400, Fixed Costs $16,800, Fixed Cost divided by Contribution Margin per Unit $16,800 divided by $400, Break-Even in Units 42, Break Even in Dollars 42 times $1,250 equals $52,500, Contribution Margin Ratio (CM divided by Sales or $400 divided by $1,250) 32 percent, Break-even in Sales Dollars (FC divided by CM or $16,800 divided by .32 equals $52,500, Break-Even in Units (Break Even Sales divided by Unit Selling Price or $42,500 divided by $1,250 equals 42 units. Return

Price Change Analysis: With Current Price, With New Price (respectively): Sales Price per Unit $3.75, $4.25; Variable Cost per Unit 1.50, 1.50; Contribution Margin per Unit $2.25, $2.75; Fixed Costs $2,475, $2,475; Break-even in Units 1,100, 900; Break-even in Dollars $4,125, $3,825. Contribution Margin Income Statement: Current Price, New Price (respectively): Unit Sales Expected 1,500, 1,500; Sales $5,625, $6,375; Variable Costs 2,250, 2,250; Contribution Margin $3,375, $4,125; Fixed Costs 2,475, 2,475; Net Income $900, $1,650. Return

Variable Cost Change Analysis: With Current Price, With Increased Variable Cost (respectively): Sales Price per Unit $3.75, $3.75; Variable Cost per Unit 1.50, 1.55; Contribution Margin per Unit $2.25, $2.20; Fixed Costs $2,475, $2,475; Break-even in Units 1,100, 1,125; Break-even in Dollars $4,125, $4,218.75. Monthly Contribution Margin Income Statement: Current Variable Cost, Increased Variable Costs (respectively): Unit Sales Expected 1,500, 1,500; Sales $5,625, $5,625; Variable Costs 2,250, 2,325; Contribution Margin $3,375, $3,300; Fixed Costs 2,475, 2,475; Net Income $900, $825. Return

Fixed Cost Change Analysis: With Current Price, With Increased Fixed Cost (respectively): Sales Price per Unit $3.75, $3.75; Variable Cost per Unit 1.50, 1.50; Contribution Margin per Unit $2.25, $2.25; Fixed Costs $2,475, $2,700; Break-even in Units 1,100, 1,200; Break-even in Dollars $4,125, $4,500. Monthly Contribution Margin Income Statement: Current Fixed Costs, Increased Fixed Costs (respectively): Unit Sales Expected 1,500, 1,500; Sales $5,625, $5,625; Variable Costs 2,250, 2,250; Contribution Margin $3,375, $3,375; Fixed Costs 2,475, 2,700; Net Income $900, $675. Return

Variable Cost and Fixed Cost Change Analysis: With Current Price, With Decreased VC and Increased FC (respectively): Sales Price per Unit $3.75, $3.75; Variable Cost per Unit 1.50, 1.45; Contribution Margin per Unit $2.25, $2.30; Fixed Costs $2,475, $2,875; Break-even in Units 1,100, 1250; Break-even in Dollars $4,125, $4,687.50. Contribution Margin Income Statement: Current Fixed Costs, Increased Fixed Costs (respectively): Unit Sales Expected 1,500, 1,500; Sales $5,625, $5,625; Variable Costs 2,250, 2,175; Contribution Margin $3,375, $3,450; Fixed Costs 2,475, 2,875; Net Income $900, $575. Return

Selling Price, Variable Cost, and Fixed Cost Change Analysis: With Current Price, With Decreased VC and Increased FC, With Increased SP Decreased VC and Increased FC (respectively): Sales Price per Unit $3.75, $3.75, $3.95; Variable Cost per Unit 1.50, 1.45, 1.45; Contribution Margin per Unit $2.25, $2.30, $2.50; Fixed Costs $2,475, $2,875, $2,875; Break-even in Units 1,100, 1,250, 1,150; Break-even in Dollars $4,125, $4,687.50, $4,542.50. Contribution Margin Income Statement: With Current Price, With Decreased VC and Increased FC, With Increased SP Decreased VC and Increased FC (respectively): Unit Sales Expected 1,500, 1,500, 1,500; Sales $5,625, $5,625, 5,925; Variable Costs 2,250, 2,175, 2,175; Contribution Margin $3,375, $3,450, $3,750; Fixed Costs 2,475, 2,875, 2,875; Net Income $900, $575, 875. Return

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Break-Even Analysis Explained - Full Guide With Examples

Did you know that 30% of operating small businesses are losing money? Running your own business is trickier than it sounds. You have to plan ahead carefully to break-even or be profitable in the long run.

Building your own small business is one of the most exciting, challenging, and fun things you can do in this generation.

To start and sustain a small business it is important to know financial terms and metrics like net sales, income statement and most importantly break-even point .

Performing break-even analysis is a crucial activity for making important business decisions and to be profitable in business.

So how do you do it? That is what we will go through in this article. Some of the key takeaways for you when you finish this guide would be:

Understand what break-even point is
Know why it is important
Learn how to calculate break-even point
Know how to do break-even analysis
Understand the limitations of break-even analysis

So, if you are tired of your nine-to-five and want to start your own business, or are already living your dream, read on.

What is Break-Even Point?

Small businesses that succeeds are the ones that focus on business planning to cross the break-even point, and turn profitable .

In a small business, a break-even point is a point at which total revenue equals total costs or expenses. At this point, there is no profit or loss — in other words, you 'break-even'.

Break-even as a term is used widely, from stock and options trading to corporate budgeting as a margin of safety measure.

On the other hand, break-even analysis lets you predict, or forecast your break-even point. This allows you to course your chart towards profitability.

Managers typically use break-even analysis to set a price to understand the economic impact of various price and sales volume calculations.

The total profit at the break-even point is zero. It is only possible for a small business to pass the break-even point when the dollar value of sales is greater than the fixed + variable cost per unit.

Every business must develop a break-even point calculation for their company. This will give visibility into the number of units to sell, or the sales revenue they need, to cover their variable and fixed costs.

Importance of Break-Even Analysis for Your Small Business

A business could be bringing in a lot of money; however, it could still be making a loss. Knowing the break-even point helps decide prices, set sales targets, and prepare a business plan.

The break-even point calculation is an essential tool to analyze critical profit drivers of your business, including sales volume, average production costs, and, as mentioned earlier, the average sales price. Using and understanding the break-even point, you can measure

how profitable is your present product line
how far sales drop before you start to make a loss
how many units you need to sell before you make a profit
how decreasing or increasing price and volume of product will affect profits
how much of an increase in price or volume of sales you will need to meet the rise in fixed cost

How to Calculate Break-Even Point

There are multiple ways to calculate your break-even point.

Calculate Break-even Point based on Units

One way to calculate the break-even point is to determine the number of units to be produced for transitioning from loss to profit.

For this method, simply use the formula below:

Break-Even Point (Units) = Fixed Costs ÷ (Revenue per Unit – Variable Cost per Unit)

Fixed costs are those that do not change no matter how many units are sold. Don't worry, we will explain with examples below. Revenue is the income, or dollars made by selling one unit.

Variable costs include cost of goods sold, or the acquisition cost. This may include the purchase cost and other additional costs like labor and freight costs.

Calculate Break-Even Point by Sales Dollar - Contribution Margin Method

Divide the fixed costs by the contribution margin. The contribution margin is determined by subtracting the variable costs from the price of a product. This amount is then used to cover the fixed costs.

Break-Even Point (sales dollars) = Fixed Costs ÷ Contribution Margin

Contribution Margin = Price of Product – Variable Costs

Let’s take a deeper look at the some common terms we have encountered so far:

Fixed costs: Fixed costs are not affected by the number of items sold, such as rent paid for storefronts or production facilities, office furniture, computer units, and software. Fixed costs also include payment for services like design, marketing, public relations, and advertising.
Contribution margin: Is calculated by subtracting the unit variable costs from its selling price. So if you’re selling a unit for $100 and the cost of materials is $30, then the contribution margin is $70. This $70 is then used to cover the fixed costs, and if there is any money left after that, it’s your net profit.
Contribution margin ratio: is calculated by dividing your fixed costs from your contribution margin. It is expressed as a percentage. Using the contribution margin, you can determine what you need to do to break-even, like cutting fixed costs or raising your prices.
Profit earned following your break-even: When your sales equal your fixed and variable costs, you have reached the break-even point. At this point, the company will report a net profit or loss of $0. The sales beyond this point contribute to your net profit.

Small Business Example for Calculating Break-even Point

To show how break-even works, let’s take the hypothetical example of a high-end dressmaker. Let's assume she must incur a fixed cost of $45,000 to produce and sell a dress.

These costs might cover the software and materials needed to design the dress and be sure it meets the requirement of the brand, the fee paid to a designer to design the look and feel of the dress, and the development of promotional materials used to advertise the dress.

These costs are fixed as they do not change per the number of dresses sold.

The variable costs would include the materials used to make each dress — embellishment’s for $30, the fabric for the body for $20, inner lining for $10 — and the labor required to assemble the dress, which amounted to one and a half hours for a worker earning $50 per hour.

Thus, the unit variable costs to make a single dress is $110 ($60 in materials and $50 in labor). If she sells the dress for $150, she’ll make a unit margin of $40.

Given the $40 unit margin she’ll receive for each dress sold, she will cover her $45,500 total fixed cost will be covered if she sells:

Break-Even Point (Units) = $45,000 ÷ $40 = 1,125 Units

You can see per the formula , on the right-hand side, that the Break-even is 1,125 dresses or units

In other words, if this dressmaker sells 1,125 units of this particular dress, then she will fully recover the $45,000 in fixed costs she invested in production and selling. If she sells fewer than 1,125 units, she will lose money. And if she sells more than 1,125 units, she will turn a profit. That’s the break-even point.

What if we change the price?

Suppose our dressmaker is worried about the current demand for dresses and has concerns about her firm’s sales and marketing capabilities, calling into question her ability to sell 1,125 units at a price of $150. What would be the effect of increasing the price to $200?

This would increase the unit margin to $90.Then the number of units to be sold would decline to 500 units. With this information, the dressmaker could assess whether she was better off trying to sell 1,125 dresses at $150 or 500 dresses at $200, and priced accordingly.

What if we want to make an investment and increase the fixed costs?

Break-even analysis also can be used to assess how sales volume would need to change to justify other potential investments. For instance, consider the possibility of keeping the price at $150, but having a celebrity endorse the dress (think Madonna!) for a fee of $20,000.

This would be worthwhile if the dressmaker believed that the endorsement would result in total sales of $66,000 (the original fixed cost plus the $20,000 for Ms. Madonna).

With the Fixed Costs at $66,000 we see, it would only be worthwhile if the dressmaker believed that the endorsement would result in total sales of 1,650 units.

In other words, if the endorsement led to incremental sales of 525 dress units, the endorsement would break-even. If it led to incremental sales of greater than 525 dresses, it would increase profits.

What if we change the variable cost of producing a good?

Break-even also can be used to examine the impact of a potential change to the variable cost of producing a good.

Imagine that our dressmaker could switch from using a rather plain $20 fabric for the dress to a higher-end $40 fabric, thereby increasing the variable cost of the dress from $110 to $130 and decreasing the unit margin from $40 to $20. How much would your sales need to increase to compensate for the extra cost?

Suppose the Variable Cost is $130 (and the Fixed Cost is $45,000 – our dressmaker can’t afford to have nice fabric plus get Ms. Madonna). It would make better sense to switch to the nicer fabric if the dressmaker thought it would result in sales of 2,250 units, an additional 1125 dresses, which is double the number of initial sale numbers.

You likely aren’t a dressmaker or able to get a celebrity endorsement from Ms. Madonna, but you can use break-even analysis to understand how the various changes of your product, from revenue, costs, sales, impact your small business’s profitability .

What Are the Benefits of Doing a Break-even Analysis?

Smart Pricing : Finding your break-even point will help you price your products better. A lot of effort and understanding goes into effective pricing, but knowing how it will affect your profitability is just as important. You need to make sure you can pay all your bills.

Cover Fixed Costs : When most people think about pricing, they think about how much their product costs to create. Those are considered variable costs. You will still need to cover your fixed costs like insurance or web development fees. Doing a break-even analysis helps you do that.

Avoid Missing Expenses : When you do a break-even analysis, you have to lay out all your financial commitments to figure out your break-even point. It’s easy to forget about expenses when you’re thinking through a business idea. This will limit the number of surprises down the road.

Setting Revenue Targets : After completing a break-even analysis, you know exactly how much you need to sell to be profitable. This will help you set better sales goals for you and your team.

Decision Making : Usually, business decisions are based on emotion. How you feel is important, but it’s not enough. Successful entrepreneurs make their decisions based on facts. It will be a lot easier to decide when you’ve put in the work and have useful data in front of you.

Manage Financial Strain : Doing a break-even analysis will help you avoid failures and limit the financial toll that bad decisions can have on your business. Instead, you can be realistic about the potential outcomes by being aware of the risks and knowing when to avoid a business idea.

Business Funding : For any funding or investment, a break-even analysis is a key component of any business plan. You have to prove your plan is viable. It’s usually a requirement if you want to take on investors or other debt to fund your business.

When to Use Break-even Analysis

Starting a new business.

If you’re thinking about a small online business or e-commerce, a break-even analysis is a must. Not only does it help you decide if your business idea is viable, but it makes you research and be realistic about costs, as well as think through your pricing strategy.

Creating a new product

Especially for a small business, you should still do a break-even analysis before starting or adding on a new product in case that product is going to add to your expenses. There will be a need to work out the variable costs related to your new product and set prices before you start selling.

Adding a new sales channel

If you add a new sales channel, your costs will change. Let's say you have been selling online, and you’re thinking about opening an offline store; you’ll want to make sure you at least break-even with the brick and mortar costs added in. Adding additional marketing channels or expanding social media spends usually increases daily expenses. These costs need to be part of your break-even analysis.

Changing the business model

Let's say you are thinking about changing your business model; for example, switching from buying inventory to doing drop shipping or vice-versa, you should do a break-even analysis. Your costs might vary significantly, and this will help you figure out if your prices need to change too.

Limitations of Break-even Analysis

The Break-even analysis focuses mostly on the supply-side (i.e., costs only) analysis. It doesn't tell us what sales are actually likely to be for the product at various prices.
It assumes that fixed costs are constant. However, an increase in the scale of production is likely to lead to an increase in fixed costs.
It assumes average variable costs are constant per unit of output, per the range of the number of sales
It assumes that the number of goods produced is equal to the number of goods sold. It believes that there is no change in the number of goods held in inventory at the beginning of the period and the number of goods held in inventory at the end of the period
In multi-product companies, the relative proportions of each product sold and produced are fixed or constant.

So that's a wrap. Hope you found this article interesting and informative. Feel free to subscribe to our blog to get updates on awesome new content we publish for small business owners.

Key Takeaways

Break-even analysis is infinitely valuable as it sets the framework for pricing structures, operations, hiring employees, and obtaining future financial support.

You can identify how much, or how many, you have to sell to be profitable.
Identify costs inside your business that should be alleviated or eliminated.

Remember, any break-even analysis is only as strong as its underlying assumptions.

Like many forecasting metrics, break-even point is subject to it's limitations; however it can be a powerful and simple tool to provide a small business owner with an idea of what their sales need to be in order to start being profitable as quickly as possible.

Lastly, please understand that break-even analysis is not a predictor of demand .

If you go to market with the wrong product or the wrong price, it may be tough to ever hit the break-even point. To avoid this, make sure you have done the groundwork before setting up your business.

Head over to our small business guide on setting up a new business if you want to know more.

Want to calculate break even point quickly? Use our handy break-even point calculator.

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What Is the Breakeven Point (BEP)?

Understanding breakeven points, business breakeven points.

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Breakeven Point: Definition, Examples, and How to Calculate

In corporate accounting, the breakeven point (BEP) is the moment a company's operations stop being unprofitable and starts to earn a profit. The breakeven point is the production level at which total revenues for a product equal total expenses. The breakeven point can also be used in other ways across finance such as in trading.

Key Takeaways

In accounting, the breakeven point is calculated by dividing the fixed costs of production by the price per unit minus the variable costs of production.
The breakeven point is the level of production at which the costs of production equal the revenues for a product.
In investing, the breakeven point is said to be achieved when the market price of an asset is the same as its original cost.
A breakeven analysis can help with f i nding missing expenses, limiting decisions based on emotions, establishing goals, securing funding, and setting appropriate prices.

Investopedia / Nez Riaz

A breakeven point can be applied to a wide variety of contexts. For instance, the breakeven point in a property would be how much money the homeowner would need to generate from a sale to exactly offset the net purchase price , inclusive of closing costs, taxes, fees, insurance, and interest paid on the mortgage—as well as costs related to maintenance and home improvements. At that breakeven price, the homeowner would exactly break even, neither making nor losing any money.

Traders also apply BEPs to trades, figuring out what price a security must reach to exactly cover all costs associated with a trade, including taxes, commissions, management fees, and so on. A company’s breakeven point is likewise calculated by taking fixed costs and dividing that figure by the gross profit margin percentage.

The breakeven formula for a business provides a dollar figure that is needed to break even. This can be converted into units by calculating the contribution margin (unit sale price less variable costs). Dividing the fixed costs by the contribution margin will reveal how many units are needed to break even.

Business Breakeven = Fixed Costs Gross Profit Margin \begin{aligned} &\text{Business Breakeven} = \frac { \text{Fixed Costs} }{ \text{Gross Profit Margin} } \\ \end{aligned} Business Breakeven = Gross Profit Margin Fixed Costs

Assume a company has $1 million in fixed costs and a gross margin of 37%. Its breakeven point is $2.7 million ($1 million ÷ 0.37). In this breakeven point example, the company must generate $2.7 million in revenue to cover its fixed and variable costs. If it generates more sales, the company will have a profit. If it generates fewer sales, there will be a loss.

It is also possible to calculate how many units need to be sold to cover the fixed costs, which will result in the company breaking even. To do this, calculate the contribution margin, which is the sale price of the product less variable costs . We'll look at that calculation next.

Breakeven Point and Contribution Margin

The breakeven point is heavily related to a company's contribution margin. The contribution margin is the amount a product's selling price exceeds its variable cost. It's calculated as:

Contribution Margin per Unit = Selling Price per Unit - Variable Cost per Unit

This margin indicates how much of each unit's sales revenue contributes to covering fixed costs and generating profit once fixed costs are met. For example, if a product sells for $10 but only incurs $3 of variable costs per unit, the product has a contribution margin of $7. Note that a product's contribution margin may change (i.e. it may become more or less efficient to manufacture additional goods).

The relationship between contribution margin and breakeven point is that even a dollar of contribution margin chips away at a company's fixed cost. A higher contribution reduces the number of units needed to break even because each unit contributes more towards covering fixed costs. Conversely, a lower contribution margin increases the breakeven point, requiring more units to be sold to cover fixed costs.

Let's look at one more example. In the example above, our contribution margin per unit was $7. Assume a company has $70,000 of fixed costs. The company must sell 10,000 units to break even. If the company can increase its contribution margin per unit to $8 (by perhaps lowering its per unit variable cost), it only needs to sell 8,750 ($70,000 / $8) to break even.

Note that in the prior example, the fixed costs are "paid for" by the contribution margin. The more profit a company makes on its units, the fewer it needs to sell to break even.

Benefits of a Breakeven Analysis

A breakeven analysis can help with many things, including:

Finding Missing Expenses: A break-even analysis can help uncover expenses that you otherwise might not have seen coming. Your financial commitments will be determined at the end of a breakeven analysis, so there won’t be any surprises down the line.
Limiting Decisions Based on Emotions: Making business decisions based on emotions is rarely a good idea, but it can be hard to avoid. A break-even analysis leaves you with hard facts, which is a better viewpoint from which to make business decisions.
Setting Goals: You will know exactly what kind of goals need to be met to make a profit after a breakeven analysis. This helps you set goals and work toward them.
Securing Funding: Often, you will need to use a break-even analysis to secure funding and show investors the plan for your business.
Pricing Appropriately . A break-even analysis will show you how to properly price your products from a business standpoint.

Limitations of Breakeven Point

While the breakeven point is a valuable tool for decision-making, it has several limitations. One major downside is its reliance on the assumption that costs can be neatly divided into fixed and variable categories. In reality, some costs may not fit cleanly into these categories. For example, semi-variable costs , which have both fixed and variable components, can complicate the accuracy of the breakeven calculation which then changes the breakeven point in units.

Another limitation is that the breakeven point assumes that sales prices, variable costs per unit, and total fixed costs remain constant, which is often not the case. The price of goods sold at fluctuates, and the cost of raw materials may hardly stay stable. In addition, changes to the relevant range may change, meaning fixed costs can even change. This makes it almost impossible to always have a most up-to-date, accurate breakeven point.

Finally, the breakeven analysis often ignores qualitative factors such as market competition, customer satisfaction, and product quality. While the breakeven point focuses on financial metrics, successful business decisions also require a holistic view that looks outside the number. For example, it may just not be feasible to sell 10,000 units given the current market for the example above.

Assume an investor buys Microsoft stock ( MSFT ) at $110. That is now their breakeven point on the trade. If the price moves above $110, the investor is making money. If the stock drops below $110, they are losing money. If the price stays right at $110, they are at the BEP because they are not making or losing anything. Options can help investors who are holding a losing stock position using the option repair strategy .

Call Option Breakeven Point Example

For options trading, the breakeven point is the market price that an underlying asset must reach for an option buyer to avoid a loss if they exercise the option. For a call buyer, the breakeven point is reached when the underlying asset is equal to the strike price plus the premium paid, while the BEP for a put position is reached when the underlying asset is equal to the strike price minus the premium paid. The breakeven point doesn’t typically factor in commission costs, although these fees could be included if desired.

Assume that an investor pays a $5 premium for an Apple stock ( AAPL ) call option with a $170 strike price. This means that the investor has the right to buy 100 shares of Apple at $170 per share at any time before the options expire . The breakeven point for the call option is the $170 strike price plus the $5 call premium, or $175. If the stock is trading below this, then the benefit of the option has not exceeded its cost.

If the stock is trading at $190 per share, the call owner buys Apple at $170 and sells the securities at the $190 market price. The profit is $190 minus the $175 breakeven price, or $15 per share.

Put Option Breakeven Point Example

Assume an investor pays a $4 premium for a Meta (formerly Facebook) put option with a $180 strike price. That allows the put buyer to sell 100 shares of Meta stock ( META ) at $180 per share until the option’s expiration date. The put position’s breakeven price is $180 minus the $4 premium, or $176. If the stock is trading above that price, then the benefit of the option has not exceeded its cost.

If the stock is trading at a market price of $170, for example, the trader has a profit of $6 (breakeven of $176 minus the current market price of $170).

What Is a Breakeven Point?

A breakeven point is used in multiple areas of business and finance. In accounting terms, it refers to the production level at which total production revenue equals total production costs. In investing, the breakeven point is the point at which the original cost equals the market price. Meanwhile, the breakeven point in options trading occurs when the market price of an underlying asset reaches the level at which a buyer will not incur a loss.

Why Is Breakeven Point Important?

The breakeven point is important because it identifies the minimum sales volume needed to cover all costs, ensuring no losses are incurred. It aids in strategic decision-making regarding pricing, cost control, and sales targets.

How Do You Calculate a Breakeven Point?

Generally, to calculate the breakeven point in business , fixed costs are divided by the gross profit margin. This produces a dollar figure that a company needs to break even. When it comes to stocks, for example, if a trader bought a stock at $200, and nine months later, it reached $200 again after falling from $250, it would have reached the breakeven point.

How Do You Calculate a Breakeven Point in Options Trading?

Consider the following example in which an investor pays a $10 premium for a stock call option, and the strike price is $100. The breakeven point would equal the $10 premium plus the $100 strike price, or $110. On the other hand, if this were applied to a put option, the breakeven point would be calculated as the $100 strike price minus the $10 premium paid, amounting to $90.

A breakeven point tells you what price level, yield, profit, or other metric must be achieved not to lose any money —or to make back an initial investment on a trade or project. Thus, if a project costs $1 million to undertake, it would need to generate $1 million in net profits before it breaks even.

Calculating breakeven points can be used when talking about a business or with traders in the market when they consider recouping losses or some initial outlay. Options traders also use the technique to figure out what price level the underlying price must be for a trade so that it expires in the money . A breakeven point calculation is often done by also including the costs of any fees, commissions, taxes, and in some cases, the effects of inflation .

OpenStax, Rice University. " Principles of Accounting, Volume 2: Managerial Accounting; 3.2 Calculate a Break-Even Point in Units and Dollars ."

CME Group Education. " Explaining Put Options (Short and Long) ."

CME Group Education. " Explaining Call Options (Short and Long) ."

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Break Even Analysis Occurs in Which Area of the Business

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Break even analysis occurs in which area of the business plan?

A) Financial plan B) Risks and assumptions C) Marketing plan D) HR plan

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Break-Even Analysis

What is break-even analysis.

Break-even analysis is a financial calculation used to determine the point at which a business’s revenues equal its expenses, resulting in neither profit nor loss. This analysis not only helps in understanding the organization’s financial standing but also aids in strategic planning and decision-making. It’s a critical metric that provides businesses with a clear financial target, guiding them toward profitability.

Break-even point
Cost-volume-profit analysis
Zero-profit point

Components of Break-Even Analysis

Understanding the intricacies of break-even analysis requires a deep dive into its primary components. Each component plays a distinct role, and together, they form the backbone of this financial tool, ensuring its precision and applicability. These components are outlined below:

Fixed Costs

At the heart of any financial analysis are the organization’s fixed costs . As the name suggests, these costs remain unchanged, regardless of the level of production or sales. They are the foundational expenses a business incurs, even if no production occurs. Common examples of fixed costs include:

Rent : Whether leasing an office space or a production facility, rent is a recurring expense that doesn’t vary with production levels.
Salaries : Employee salaries, especially for non-production staff, remain consistent month over month, irrespective of the company’s production volume.
Insurance : Premiums for various insurance policies, such as liability or property insurance, are typically fixed and recur at regular intervals.

Variable Costs

In contrast to fixed costs, variable costs are directly proportional to production levels. These costs rise as production increases and decrease when it drops. Key examples of variable costs encompass:

Materials : The raw materials required for production are a prime example. If a company produces more goods, it will naturally need more materials.
Direct Labor : This refers to the wages of workers directly involved in the production process. More labor hours might be needed as production scales, leading to higher labor costs.
Manufacturing Supplies : These are the ancillary items used in the production process, such as lubricants for machines or packaging materials for finished products.

Selling Price

Central to the break-even analysis is the selling price. It’s the price tag attached to a product or service when presented to potential customers. The selling price is a determinant factor in calculating the revenue generated from sales and plays a pivotal role in understanding profit margins.

Variables in Break-Even Analysis

Break-even analysis is not just about costs and selling prices. While the primary components provide the foundation, several variables fine-tune the break-even analysis, ensuring a more accurate and actionable insight.

Contribution Margin : A key variable in break-even analysis, the contribution margin , represents the portion of sales revenue that exceeds variable costs. It’s calculated by subtracting variable costs from the selling price. This margin is crucial as it indicates the revenue from each sale that contributes to covering fixed costs. A higher contribution margin means fewer sales are needed to break even.
Break-Even Volume : Another essential variable, the break-even volume, signifies the quantity of products or services that must be sold to cover all costs, both fixed and variable. It provides businesses with a tangible target, guiding them on the sales volume required to ensure they neither make a loss nor a profit.

Break-Even Analysis Formula

The mathematical representation of the break-even analysis is straightforward and offers a concise way to determine the point at which total costs equal total revenues.

Break-even point (in units) = Fixed Costs / (Selling Price – Variable Costs per unit)

Fixed Costs : These are the consistent costs a business incurs, regardless of production levels. It includes expenses like rent, salaries, and other overheads that don’t vary with production or sales.
Selling Price : This is the amount at which a product or service is sold to customers. It represents the revenue earned from each unit sold.
Variable Costs per unit : These are the costs directly associated with producing one unit of a product or service. It fluctuates based on production levels and includes costs like raw materials and direct labor.

By plugging the appropriate values into the formula, businesses can ascertain the units they need to sell to break even. This point is crucial as it represents a threshold. Sales below this threshold result in a loss, while sales above it lead to a profit. The break-even analysis formula thus serves as a vital tool for financial planning and strategic decision-making.

Practical Use of the Break-Even Point in Business

The break-even point is more than just a theoretical concept; it has tangible applications that can profoundly impact a business’s strategic decisions and operations. Here are some practical uses, accompanied by real-world examples:

Risk Assessment

By identifying the break-even point, businesses can gauge the potential risks associated with their ventures.

Example : A new café in a bustling city calculates its break-even point as selling 200 cups of coffee daily. If the average foot traffic in the area suggests they might only sell 150 cups daily, the owners can foresee a potential risk and might reconsider their location or marketing strategy.

Financial Planning

The break-even point is a benchmark for financial forecasting, helping businesses allocate resources more effectively.

Example : After calculating its break-even point, a tech startup realizes it will not reach profitability for another year. This insight allows them to seek additional funding in advance, ensuring they can sustain their business operations until they become profitable.

Setting Pricing Strategies

Understanding the break-even point can guide businesses in determining the optimal pricing strategy for their products or services, ensuring they cover costs while remaining competitive.

Example : After factoring in production and operational costs, a clothing brand determines that they need to sell their shirts at $30 each to break even. However, market research indicates that similar shirts are priced at $25. The brand might then explore ways to reduce production costs or add unique features to justify the higher price.

Evaluating Business Models

For startups and new ventures, the break-even point can be instrumental in assessing the viability of their business model.

Example : An entrepreneur looking to start a subscription-based online fitness platform calculates the break-even point based on projected subscribers and monthly fees. If the required subscriber count to break even is significantly higher than the target audience size, the entrepreneur might reconsider the revenue model .

Product Launch Viability

Established companies can use the break-even point to decide whether launching a new product is financially sound.

Example : A cosmetic company wants to introduce a new skincare line. By calculating the break-even point for this product, they can determine the minimum units they need to sell to cover the research, production, and marketing costs. If this number aligns with their revenue projections , they can confidently proceed.

Benefits of Break-Even Analysis

Break-even analysis is more than a financial tool; it’s a strategic asset that offers distinct advantages to businesses. Here’s a closer look at its benefits:

Financial Clarity

Break-even analysis demystifies financial targets. By determining the exact sales volume needed to cover costs, businesses gain a clear financial roadmap.

Example : A local gym, after conducting a break-even analysis, understands they need 100 memberships to cover their monthly overheads. This clarity helps them set realistic membership goals.

Informed Decision Making

Rather than relying on guesswork, break-even analysis provides concrete data, enabling businesses to make decisions with confidence.

Example : Before printing a new book, a publishing house can use break-even analysis to ascertain the number of copies they need to sell to cover printing and marketing expenses.

Strategic Pricing

In a market where pricing can be a competitive edge, break-even analysis ensures that businesses price their products or services not just to cover costs but also to achieve desired profit margins.

Example : A craft beer brewery, after determining its break-even point, can decide on the pricing of its beer, considering both production costs and market demand.

By harnessing these benefits, businesses can make informed decisions, optimize product pricing , and achieve clearer financial planning.

Limitations & Challenges of Break-Even Analysis

Break-even analysis, though invaluable, is not without its limitations. Like any analytical tool, it’s essential to recognize its boundaries to employ it effectively. Here are some challenges that businesses might encounter:

Static Assumptions

One of the foundational assumptions of break-even analysis is the constancy of fixed costs and selling prices. However, in the ever-evolving business landscape, these constants can shift.

Example : A smartphone manufacturer might base its break-even analysis on a fixed selling price. However, rapid technological advancements or unexpected market entrants can necessitate price adjustments, rendering the initial analysis less accurate.

Simplification

Break-even analysis, by design, simplifies complex business realities. While this makes the tool more accessible, it can sometimes overlook critical external factors.

Example : A coffee shop might calculate its break-even point based on current costs and prices. However, the analysis might not factor in potential challenges like a new competitor opening nearby, seasonal fluctuations in customer footfall, or changes in supplier prices due to global events.

Overlooking Economies of Scale

As businesses grow and production levels increase, they often benefit from economies of scale, where the cost per unit decreases with the increase in production volume. Traditional break-even analysis might not always account for this.

Example : A shoe manufacturer, after expanding its operations, might find that the cost of producing each pair of shoes decreases due to bulk purchasing of materials. A standard break-even analysis might not capture these reduced costs , leading to skewed results.

Not Accounting for Multiple Products

Many businesses offer a range of products with varying costs and prices. A straightforward break-even analysis might struggle to provide a comprehensive view of such scenarios.

Example : A cosmetic brand selling a range of products from lipsticks to skincare might find it challenging to determine a collective break-even point, as each product has different production costs and selling prices.

An Indispensable Business Tool

Break-even analysis is an indispensable tool for businesses, offering clarity on financial targets and aiding in strategic decision-making. While it has its limitations, understanding its components, benefits, and practical applications can pave the way for informed business strategies. From nimble startups to seasoned enterprises, leveraging this analysis is a ticket to staying ahead in the fast-paced business world.

How often should a break-even analysis be conducted?

The frequency of conducting a break-even analysis should align with the business’s operational and market dynamics. It’s advisable to revisit the analysis regularly as part of quarterly or annual financial reviews. However, it becomes imperative to re-evaluate the break-even point when there are notable shifts in the business landscape. This includes significant changes in production costs, alterations in selling prices, introduction of new products, or any external market events that could impact sales volume or cost structures.

Why is the break-even point considered a critical metric?

The break-even point serves as a financial milestone for businesses. It represents the sales threshold where total revenues match total costs, indicating neither a profit nor a loss. By understanding this point, businesses can set clear financial targets, strategize their pricing, and make informed decisions about scaling operations or entering new markets.

Does break-even analysis consider qualitative factors?

While the primary focus of break-even analysis is quantitative, considering fixed and variable costs against sales, it’s essential to recognize that qualitative factors can influence these numbers. Factors like brand reputation, customer loyalty, and market trends can impact selling prices and sales volumes. While these qualitative aspects might not be directly plugged into the formula, they play a crucial role in the broader business strategy and, by extension, the break-even analysis.

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Break even analysis occurs in which area of the business plan? A) Financial plan B) Risks and assumptions C) Marketing plan D) HR plan
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Break Even Calculator
The Break Even Calculator uses the following formulas: Q = F / (P − V) , or Break Even Point (Q) = Fixed Cost / (Unit Price − Variable Unit Cost) Where: Q is the break even quantity, F is the total fixed costs, P is the selling price per unit, V is the variable cost per unit. Total Variable Cost = Expected Unit Sales × Variable Unit Cost.
Break even analysis occurs in which area of the business plan?
Click here 👆 to get an answer to your question ️ Break even analysis occurs in which area of the business plan? a. Marketing plan b. HR plan c. Risks and ass…

What is Break-Even Analysis?

How to reduce the break-even point

Key Highlights

Explanation:

Factors that Increase a Company’s Break-Even Point

1. Increase in customer sales

2. Increase in production costs

3. Equipment repair

1. Raise product prices

2. Outsourcing

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3.2 Calculate a Break-Even Point in Units and Dollars

Basics of the Break-Even Point

Ethical Considerations

Link to Learning

Sales Where Operating Income Is $0

Sales Where Operating Income Is Negative

Sales Where Operating Income Is Positive

Think It Through

Examples of the Effects of Variable and Fixed Costs in Determining the Break-Even Point

Application of Break-Even Concepts for a Service Organization

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Break-Even Analysis: What It Is and How to Calculate

What is the break-even analysis formula?

Break-even analysis example

When to use break-even analysis

Break-Even Analysis

What Is Break Even Analysis?

How Is Break Even Analysis Used?

Break-Even Analysis vs. Break-Even Point

Break Even Analysis Varies Among Industries

Break Even Analysis Formula

Fixed Costs

Variable Costs

Contribution Margin

Earned Profit

Example of Break Even Analysis

Remember: Fixed Costs Can Increase

Break-Even Analysis Benefits

Calculating Break Even Analysis in Excel

Step 1: Find Goal Seek

Step 2: Enter Your Numbers Into the Break Even Point

Step 3: Review the Number of Units Required to Break Even

Optional: Create A Scenario Simulator for Multiple Units of Sale

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10.6 Breakeven Analysis

Key Takeaways

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Module: Accounting and Finance

Contribution Margin

Breakeven in Units

Breakeven in Sales Dollars

A Broader Perspective: Even Colleges Use Breakeven

Contribution Margin Ratio

An Accounting Perspective: Business Insight

Margin of Safety

Try It: The Rise of the Business Guru

Check Your Understanding

7.2 Breakeven Analysis

Sales Where Operating Income Is $0

Sales Where Operating Income Is Negative

Sales Where Operating Income Is Positive

Examples of the Effects of Variable and Fixed Costs in Determining the Break-Even Point

Application of Break-Even Concepts for a Service Organization

College Creations

The Effects on Break-Even under Changing Business Conditions

Changing a Single Variable

Change in Sales Price

Change in Variable Cost

Change in Fixed Cost

Changing Multiple Variables

Long Descriptions

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Break-Even Analysis Explained - Full Guide With Examples