Break even Point Formula
The break-even point is the level of production at which the cost of production is equal to the revenue for a product.
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BREAK-EVEN POINT FORMULA
To learn how to find a break-even point, you must know the break-even point formula. To understand how to calculate the break-even point, you need the following:
- Fixed Costs
- Variable costs
- The Selling Price of the Product
So what is the difference between a fixed cost and a variable cost? Fixed costs are expenses. These are the expenses you pay to run your business, such as RENT, INSURANCE.
On the other hand, Variable costs change based on your Sales activity. If you sell more items, your variable costs more increase.
The break-even point is the point where the total cost is equal to the total revenue.
There is neither profit nor loss at the break-even point.
What is a break-even point? How do we use it? Everything you need to know about how to calculate break-even points.
It is a point of no profit, no loss.
Total sale=Total cost
This point is also known as a critical point or no profit, no loss. If production is increased beyond this level, the organization will profit, and if it decreases, there shall be a loss.
BREAK-EVEN ANALYSIS is a widely used technique to study the cost volume__ Profit relationships. In its narrow sense, break-even analysis is concerned with determining the break-even point(No profit No Loss).
- All costs can be separated into Fixed and Variable components
- Total fixed costs remain continual
- There is only one product
- Volume of production is an equal volume of Sales.
- productivity per worker does not change.
- Cost can be divided into Fixed and Variable costs.
- selling price is not affected by changes in the volume of output
- Separation of costs
- Constancy of fixed costs
- Constancy of selling price
Break-even point= Fixed cost ÷ gross profit margin
Contribution margin = sales price – variable costs
Break-even point = fixed costs ÷ contribution margin
|COST OF SALES VARIABLE COST||373.40|
|SG AND A EXPENSES||106.51|
Fixed cost is calculated using the formula given below
Fixed costs = SG & A expenses + interest + taxes
|FIXED COST FORMULA||106.51+2.18+4.60|
- It facilitates a view into the facts about revenue from a product or service in cooperation with the ability to cover the relevant production cost of that particular service or not.
- It makes important decisions in business, for Example, preparing competitive bids, setting prices, and applying for loans.
- Managers’ decisions to discontinue the product or improve the advertising strategies or even reprice the product to increase demand will depend upon Break even Point.
Break-Even is a circumstance where an organization is “neither making money nor losing money,” but all the costs have been covered. Costs of Rs. 1,00,000 similar selling products.
Benefits of Break-Even Point
- Catch missing expenses: When you are thinking about a “New occupation,” it’s very important that you forget about some costs. Therefore, Break-Even Analysis can help you to review all Financial commitments. This analysis certainly restricts the Number of people amazed down the road or prepares a company for them.
- Set Revenue targets: Once the Break-Even Analysis is complete, you will get to know how much you need to sell to be gainful. This will assist you and your sales team in setting more expressive sales goals….
- Make__ smarter decisions: Entrepreneurs frequently make Business Decisions based on emotions. If they feel superb about a new investment, they go for it. How you feel is very important, but it’s no more sufficient. Affluent entrepreneurs make their decisions based on specific attitudes.
Break-even Analysis helps diminish risk by manifesting yourself. It will assist you to avoid non_success and limit the financial toll that worst choices can have on your business. Preferably, you can be logical about the potential outcomes.
- Fund your business-Break-even analysis is an essential element for any business to start its plant. You have to prove Your Plan is achievable. Apart from this, if your analysis becomes very good, then you will become very comfortable.
The point that breaks the total cost and selling price evenly shows the level of output or sales at which there shall be neither profit nor loss.
At this point.
The income of a business exactly equals its expenditure.
Total cost=Total Sales
If the volume of output/sales is to be computed for a ‘Desired Profit,’ The Amount of ‘Desired Profit’ Should be added to the fixed cost in the formula.
FOR EXAMPLE, the Break-even point is at 6000 units it means the company will start earning profits after 6000 units, but demand in the market is just 5000 units, reflecting a loss on the product.
The Break-even point is also called the break-even level. We would not be making a profit, nor were we incurring losses; as much as we have spent, we get recovered. Consisting of both fixed and variable costs.
Also, Read Customer Acquisition And Retention Strategies (Full Guide)
The government needs money; it needs more taxes to operate.
GOVERNMENT levy and collect taxes is to later spend it for social welfare in public expenditure like laying roads and providing social services.
Before starting any new business, many calculations are very necessary for all of you to know.
- Financial Break-Even: The Revenue point of view at which the new business covers all its financial commitments to external parties but is not yet paying the owners a wage for their work or a return on their investment.
- Sustainable Break Even: The Revenue point at which the”new profession is meeting its financial commitments” to external parties and paying the owners what it would cost to replace them with staff and providing the owners with a competitive rate of return on their investment.
- Equity Break Even: The Amount of Revenue Required to Repay from profits the equity invested by the “Owners in the business.”
To put it simply, a Break-Even point is a term used in BUSINESS and ECONOMICS, wherein the investment that you made in your business, Inclusive of all costs, is repaid through the Revenues, wherein you don’t have a loss ( or a profit either )
- You spend Ten Rupees to buy a pencil.
- Your friend is unwell to go to a shop to buy it.
- So you sell it to him for Ten Rupees.
- Neither profit. Nor loss.
This is a break-even point.
The Break-Even point in Economics, Commerce, and Business is when cost and Revenue are equal. That is the point at which there is nor profit nor loss. The Production at the Break-even point is calculated by using the formula:
Production at “BEP”= Fixed Costs__Contribution Per Unit of Sales.
Contribution per unit of sale = Sales value- Variable cost
Break-Even Analysis is a decision-making process to decide the number of units to be produced to get the desired position profit. This analysis is based on the belief that the Cost can be Segregated into expenses and expenditures. The Production at the desired position of Profit is calculated as Follows_
Production at a Desired level of Profit.
BREAK-EVEN POINT FORMULA
BREAK-EVEN ANALYSIS EXAMPLE
Break-Even Analysis is to place the point at which you start making a profit.
It is relevant to both products and services.
It is quantified to a specific period.
Let’s say you Make Pens.
How to calculate the Break-even point.
You have set up a factory. The total cost of the factory is ₹130lakhs—the life of the factory is 20 years. So the factory cost per year is ₹20 lakhs. So the factory cost per month is ₹2 lakh. This is your secure cost per month.
The cost of Raw Materials, Labor, Electricity for making 2000 pens. So the cost of making a pen is ₹10/- (6000/11000). This is called variable cost.
Let’s say you are Selling the pen at ₹8/- per pen.
Selling price – Variable cost calculation is ₹6- ₹7, which is ₹3 per unit.
This ₹3 is called contribution per pen, i.e., per unit.
So let’s Calculate when you will make a profit in a month.
You have a factory cost of ₹2lakh per month. So that needs to be covered first before you can Count Profit 🙂
BREAK-EVEN POINT FORMULA:
Ratio = Contribution
It assumes that the selling price remains unchanged practically.
Break-Even point Formula is rare to remain constant because the selling price depends upon certain factors like market demand and supply, Competition, etc.
It assumes that only one product is produced or that product mix will remain unchanged, but practically it is very difficult to find
Incorporate accounting; the break-even point formula is purposeful By Dividing The Total Fixed Costs. In this condition, fixed costs transfer to those which do not change depending upon the Number of
USES OF BREAK-EVEN ANALYSIS
- It Assists in the Decision Selling Price, which will give the suitable benefits
- Break-even analysis assists in the concern of sales volume to cover a Given Return on Capital Employed.
- It assists in forecast costs and benefits as a result of Some Changes in Volume.
Assigning fixed costs over a variety of products can lead to a problem. It supposes that the business conditions may not change, which is not possible.
It supposes that production and sales are equal and there is no change in the opening and closing stock of finished product.
Break-even analysis is an important technique to determine profitable and non-profitable zones of production.
The Break-even point is that point of sales volume where total revenue and total expenses are equal. IT IS A POINT OF ZERO PROFIT AND ZERO LOSS.
Changes in price
Expansion of capacity
Make or buy decision
Selection of equipment