What is Break-even Analysis?
Break-even analysis is a method of cost-volume-profit analysis that is used to determine the break-even point of a business. This point is the level of sales at which the company’s expenses exactly equal its income, in other words, the business neither makes a profit nor incurs a loss. Break-even analysis helps businesses understand how much they need to sell in order to cover their costs and become profitable.
How to Calculate Break-even Point?
The break-even point is calculated by dividing the total fixed costs by the contribution margin. The contribution margin is the difference between the selling price of a product and the variable costs associated with producing it.
Example
Let’s look at an example to illustrate how break-even analysis works. Imagine a company that manufactures and sells a product for $100 per unit. The variable costs associated with producing that product are $60 per unit, and the company has total fixed costs of $15,000. The contribution margin would be $40 (100 – 60 = 40). The break-even point can then be calculated by dividing the total fixed costs by the contribution margin:
Break-even Point = Total Fixed Costs / Contribution Margin
Break-even Point = 15,000 / 40 Break-even Point = 375 units This means that the company needs to sell 375 units in order to break-even.
Importance of Break-even Analysis
Break-even analysis is an important tool for businesses, as it can help them to understand how much they need to sell in order to cover their costs and become profitable. It can also help them to identify sales targets and pricing strategies that can help them to reach their desired level of profitability.
Conclusion
Break-even analysis is a method of cost-volume-profit analysis that is used to determine the break-even point of a business. It helps businesses understand how much they need to sell in order to cover their costs and become profitable. Knowing the break-even point is important for businesses, as it can help them to identify sales targets and pricing strategies that can help them to reach their desired level of profitability.
References
- https://en.wikipedia.org/wiki/Break-even_analysis
- https://en.wikipedia.org/wiki/Cost-volume-profit_analysis
- https://en.wikipedia.org/wiki/Contribution_margin