Break-even analysis is a safety measuring system that helps in calculating the marginal safety. Well, it happens by making the comparison between the amount or units of the revenue which should be sold for covering the variables that are connected to the sales and fixed. It is used for calculating as well as understanding the profits by the project by equating their revenues with the total expenses. However, the ratio is used for other several things, but all of them are dealing with managerial accounting as well as cost management.
What is the Formula and How to Calculate?
Well for calculating the break-even point formula can be calculated by the doing the dividing the total fixed cost of production by the unit’s per price. Well, the formula looks like this:
Break-Even Points in Units = Fixed costs/ Sales Price per unit- Variable cost per unit
The price per unit is subtracting from the variable product cost, which is defining the contribution margin per unit. However, this formula can be rephrased by the contribution margin dividing the fixed cost. Here:
Break event points in units = fixed costs/ contribution margin per unit
Here it computes the unit’s total number which must be sold in order to generate enough revenue to cover all the company’s expenses.
For a break, even formula in dollars can be calculated with this:
Break-even points in dollars = sales price per unit X break-even points in units
However, this formula is for break-even points in dollars, but for calculating the break-even analysis, this is a formula which will be used:
#of units of produce the desired profit = Desired profit in dollars/ contribution margin per unit + break-even # of units
Here is an Example:
If the company require $500,000 for the profit after selling the product in the market and covering all the expenses. For the production stats, the company’s total fixed costs are $500,000, variable costs per unit are $300, the sale price per unit is $500, and desired profit is $200,000
For calculating, the first thing that is needed is break-even point per unit, for that:
2500 units = $500,000/$500-$300
Well, the company needs to at least sell 2500 units for covering up the fixed as well as variable costs. For next, the company needs to calculate the units in dollars.
$1,250,000 = 2500 units X $ 500 per units
The company now needs to sell at least 2500 units to meet the $1,250,000 equalling in sales before they gain the profit
Now, for the break-even point analysis, the company need to calculate:
3500 units = $200,000/ $500 – $300 + 2,500 units
Where is this Analysis Used?
For starting the business, break-even analysis is the must. It helps in deciding if the idea is actually viable or not, also it will help in getting realistic ideas about cost and pricing strategy. Apart from this, it can also play an important part when the new product is created or getting a launch. Apart from this, if you are planning on changing the model of your business, this can help in getting the selling price.
Sudha is the senior publisher at Finance Glad. Sudha completed her education in BBA (Bachelor of Business Administration). She lives in Chennai. She is currently heading towards the banking topics. Sudha is an expert in analyzing and writing about most of the banks and credit card reviews. Sudha main hobbies and interests are reading, writing and watching the quality stuff over the internet. She usually wants to learn more productive stuff and share the best information to her readers over the internet via Finance Glad.