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Calculating Break Even

Calculating Break Even. When will you be independent?. Finding Breakeven Units and Revenue. Break-even analysis involves finding the level of sales necessary to operate a business on a break-even basis.

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Calculating Break Even

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  1. Calculating Break Even When will you be independent?

  2. Finding Breakeven Units and Revenue • Break-even analysis involves finding the level of sales necessary to operate a business on a break-even basis. • At break-even, total costs equal total revenue, i.e., you don't make any money, but you don't lose any money either. • If you produce more units than at the break-even level, you will be generating a profit.  • Conversely, if you produce less than the break-even level, you will be losing money.

  3. Typical terms used in break-even analysis • Selling Price (SP): This is the price that each unit will sell or retail for.  • The SP is generally expressed as revenue in dollars per unit. • Variable Costs (VC):  These consist of costs directly associated with sales.  • can include direct material and labour costs, the variable part of manufacturing overhead, and transportation and sales commission expenses.  • The VC is usually expressed as a cost in dollars per unit.

  4. Typical terms used in break-even analysis • Fixed Costs (FC): These costs remain constant (or nearly so) within the projected range of sales levels.  • can include facilities costs, certain general and administrative costs, and interest and depreciation expenses.  • Units (X): The unit is another way to say number of items sold or produced.  • For the purpose of a break-even calculation, it is assumed that the number of units produced during a period is equal to the number of units sold during the same period.

  5. Calculating Break-evenNumber of Units • The following steps are involved in calculating the break-even point for a business. • Remember, at break-even the total sales revenue is equal to total costs (fixed and variable). • Determine the variables: FC, SP, and VC.  • Calculate the number of units produced or sold at break-even.SP(X) = VC(X) + FC        Rearranging the formula to solve for X, the number of units at break-even will give you:X = FC / (SP - VC)

  6. Calculating Break-evenRevenue • Calculate the break-even revenue in dollars as follows:Break-even revenue ($) = (Break-even units) x (Selling Price)

  7. Calculating Break-evenRevenue FOR EXAMPLE • Let's say you manufacture widgets.  Each unit retails at $5.  It costs you $2 to make each one, and the fixed costs for the period are $750.   • What is the break-even point in units and in sales revenue? SP = $5.00 VC = $2.00 FC = $750.00

  8. Calculating Break-evenRevenue • Break-even units        X = FC / (SP - VC)            = $750 / ($5 - $2)            = $750 / $3            = 250 units • Break even sales revenue = break-even units x SP                                          = 250 x $5                                         = $1,250

  9. Calculating Break-even In other words, you would have to manufacture 250 widgets to break-even, which results in a revenue of $1,250.

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