Breakeven Analysis—Fixed Cost, Variable Cost, & ProfitUpdated on November 30, 2022 Show
A breakeven analysis determines the sales volume your business needs to start making a profit, based on your fixed costs, variable costs, and selling price. It often is used in conjunction with a sales forecast when developing a pricing strategy, either as part of a marketing plan or a business plan. The formula for a breakeven analysis is: Fixed costs/(Revenue per unit-Variable costs per unit) Fixed CostsFixed costs are expenses that must be paid whether or not any units are produced. They are fixed over a specified period of time or range of production, and examples include:
Fixed costs are easy to calculate for existing businesses, but new businesses must do research to get the most accurate figures available. Variable CostsUnit costs vary depending on the number of products produced and other factors. For instance, the cost of the materials needed and the labor used to produce units isn't always the same. Examples of variable costs include:
Sample ComputationSuppose that your fixed costs for producing 30,000 widgets are $30,000 a year. Your variable costs are $2.20 for materials, $4 for labor, and $0.80 for overhead for a total of $7. If you choose a selling price of $12.00 for each widget, then: $30,000/($12-$7)=6,000 units. This means that selling 6,000 widgets at $12 apiece covers your costs of $30,000. Each unit sold beyond 6,000 generates $5 worth of profit. A sample breakdown leading to this calculation might look soething like this:
Using BreakEven CalculationsA breakeven analysis allows you to apply various scenarios to your breakeven point and possibly increase profits. Some reasons to calculate the analysis include:
Is the difference between actual or expected sales and sales at the breakThe margin of safety is the difference between the amount of expected profitability and the break-even point. The margin of safety formula is equal to current sales minus the breakeven point, divided by current sales.
What costs that vary in total directly and proportionately with changes in the activity level?Variable costs are costs that: a. Vary in total directly and proportionately with changes in the activity level.
Which of the following factors would cause the breakThe break-even point will increase by any of the following: An increase in the amount of the company's fixed costs/expenses. An increase in the per unit variable costs/expenses. A decrease in the company's selling prices.
What is the breakThe break-even point is where total sales revenue equals total cost. The contribution margin ratio can be calculated by subtracting the variable cost ratio from one. The break-even point in sales dollars is equal to the break-even units multiplied by cost.
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