break even Point formula Analysis
The break-even analysis lets you determine what you need to sell, monthly or annually, to cover your costs of doing business—your break-even point.
Understanding break-even analysis
The break-even analysis is not our favorite analysis because:
It is frequently mistaken for the payback period, the time it takes to recover an investment. There are variations on break even that make some people think we have it wrong. The one we do use is the most common, the most universally accepted, but not the only one possible.
It depends on the concept of fixed costs, a hard idea to swallow. Technically, a break-even analysis defines fixed costs as those costs that would continue even if you went broke. Instead, you may want to use your regular running fixed costs, including payroll and normal expenses. This will give you a better insight on financial realities. We call that “burn rate” these post-Internet days.
It depends on averaging your per-unit variable cost and per-unit revenue over the whole business.
However, whether we like it or not, this table is a mainstay of financial analysis. You may choose to leave it out, but really, a business plan would not be complete without it. And, although there are some other ways to do a break-even analysis, this is the most standard.
break even point definition
What is a break even in business?
Let me explain break-even point concept with the help of very simple problem,
Let a company have $30,000 Fixed Cost, Variable cost per unit 6 and sale price per unit $10.
break even point formula
First, we will find our relevant data from this question. For the calculation of break-even point in the sale, we will need fixed cost, Variable cost per unit and sale price per unit.
break even point accounting?
Now we will find contribution margin ratio. We know that contribution margin ratio is equal to sale less variable cost divided by sale.
break even point calculation
In our question, contribution margin ratio is 40%. Now we will put our data in a break-even point in sale formula. You have noted one point, the desired profit is not mentioned in this question. So, we will put zero for desired profit.
break even point example,
break even point in sales
First, we will find contribution margin ratio. For contribution margin ratio, we will subtract $10 sale price from $6 variable cost and divided by $10 sale price per unit and get 40% contribution margin.
Contribution Margin ratio = ($10-$6)/$10 = 0.40 or 40%
Break-Even Point sale= [$30,000+$0]/ 40% = $75,000
break even point in dollars
Now we will divide $30,000 fixed cost to 40% contribution margin ratio. We will get $75,000 break-even sales.
What is the break even point?
Now an important point you must note at that time. If we will divide $75000 break-even sales to $10 sale price per unit. We will get 7500 break even units.
Now I am going to explain Break-even in unit concepts.
Here, we need contribution margin in the unit. For contribution margin in units, we will subtract $10 sale price from $6 variable cost and get $4 contribution margin.
If we divide $30,000 fixed cost to $4 contribution margin. We get 7500 break-even units.
Once again, you must note important point here again. If we will multiply break-even units with the unit sale price. Then we will easily calculate break even in sales.
Break-Even point (BEP) Assumptions
1. Sale price remains constant.
2. Cost can be perfectly divided into variable and fixed elements.
3. Sale mix remains constant in case of multiple products.
4. Number of units produce = Number of units sold.