Dive Into A Detailed Analysis Of The Break-Even Point

A business reaches a break-even point when its total revenue becomes equal to its total costs or expenses. To put it simply, the company is neither making money nor incurring any losses at this point.

Define Break-Even Point

You can define a break-even point as that point where the total costs or expenditure is balanced by the total sales or revenue. Any company that wishes to make any significant profit has to reach this point first.

When you calculate the break-even point of a company, you can develop an insight into whether the revenue for a particular product can cover that product's production cost or not. This is vital information for business managers as they can make decisions accordingly.

For example, if a manager needs to decide whether to spend more money on advertising a particular product, he/she should know if the revenues will cover the production cost. Otherwise, the company will be running losses. You should know  about lewis turning point.

Understanding the basic definition of the break-even point can help you solve complex problems on this topic. The experts at MyAssignmenthelp.com are always there to guide you in case you need any extra help.

How To Calculate Break-Even Point?

A proper break-even point analysis will help determine the relationship between the variable cost, fixed cost, and revenue.

Fixed costs, also known as overhead costs, are those that you can relate directly to the production level. It includes salaries, rents, taxes, labour and energy costs, etc. Get details about money market.

On the other hand, variable costs increase or decrease depending on the production volume. These include the costs of raw materials, packaging, fuel, etc.

Revenue is the price at which you sell the product after subtracting the variable costs from it.

To calculate the break-even point, you can choose from any of the two methods-

• Calculating the break-even point based on units
• Determining the point based on sales dollars

These methods are pretty simple to grasp and can help you solve any break-even point analysis question quickly.

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How To Find The Break-Even Point?

You can find the break-even point of a company by following two simple processes.

1. The unit calculation

In this process, you have to divide the fixed costs by the revenue per unit after subtracting the variable price per unit. This method is the most popular among students to find the break-even point quickly.

2. The sales dollar calculation

You can determine the break-even point of a company by dividing the fixed costs by the contribution margin. The contribution margin is the price you have remaining after subtracting the variable costs from the product price. It determines how much money you take home after a sale. Know about systematic sampling.

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Break-Even Point Formula

The most common method of calculating a company's break-even point is to divide the fixed costs by the difference between the unit price and variable cost per unit. The formula for this method is-

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

You should always note that fixed cost is the overall cost, but the revenue and variable cost is per unit.

However, to calculate your break-even point for sales dollars, you have to use a different formula-

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

Contribution Margin = Price of Product – Variable Costs

Using these formulas will make it much easier to work on the break-even point analysis assignments your professors set. 

Which Conditions Will Cause The Break-Even Point To Increase?

The company's break-even point depends on two things – the anticipated revenue and the projected costs of doing the business. Several factors affect these two, such as market demand, start-up costs, variable and fixed costs, and pricing strategies. You can get detail about equity theory.

The break-even point will show a remarkable increase in three situations:

• When the amount dedicated to fixed costs and expense increase

• When the variable expense increase with no considerable hike in selling prices

• When a company that sells many products ends up selling a more significant portion of the lower contribution margin products

Now, you don't have to look anywhere else to find more information on the factors of the break-even point. All you have to do is take a peek at our vast collection of assignment samples to get on the right track.

What Is The Usefulness Of Break-Even Point?

Having a good grasp of the break-even point for a company can help you ascertain the overall ability to generate profit. Moreover, it can also help you determine-

• The unused capacity of the company after the break-even point is reached (This gives you an idea of the maximum profit a product can generate.)
• The change in profit if you increase the product price
• The amount of money you will lose in case of a dip in selling

Most commonly, the break-even point helps any start-up business ascertain the best estimation of the risk involved. It is always best to conduct this analysis before starting a business or launching a new product. It can help you determine if the potential profit from selling the product will be enough to cover the start-up costs. Leadership styles play important role in business.

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Break-Even Point Examples

While calculating a company's break-even point can be pretty straightforward, a cursory look through some examples will help you understand the process better.

Example 1: Find out the break-even point of a business with the total fixed costs at $8000, variable costs per unit as $40, and sales price per unit as $120.

In this question, you can use the formula for determining the break-even point.

Fixed Costs / (Sales Price Per Unit – Variable Costs Per Unit)

Therefore, $8000 / ($120-$40) = 100 units

Hence, the business has to sell 100 units to reach the break-even point.

Example 2: The fixed cost of a pastry shop is $10,000. The variable cost associated with producing pastries is $2 per unit. Meanwhile, the shopkeeper sells the pastries for $10. What will be the break-even point for the pastry shop?

Using the formula to calculate the break-even point, we have,

Fixed Costs / (Sales Price Per Unit – Variable Costs Per Unit)

Or, $10,000 / ($10-$2) = 1250 units

Therefore, the shopkeeper has to sell 1250 units of pastries to reach the break-even point.

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