Break Even Point is the point where total sales revenues equals total costs or a point where a corporation has zero profits.
The following are concepts necessary for a break-even analysis::
Cost: The cash or cash equivalent value sacrified for goods and services that are expected to bring current or future benefit to the organization
Fixed Costs: Costs that, in total, are constant within the relevant range as the activity output varies.
Fixed Costs 0%
Variable Cost (Per Unit Cost): Costs that, in total, vary in direct proportion to changes in a cost driver
A break-even analysis is required for decision making since it is necessary to determine the sales value that will cover costs. The relationship among fixed cost, variable cost (or cost per unit), and sales price (or selling prices per unit) determines the break-even point. Fixed costs remain the same when production or sales levels change. For example, regardless of the number of units produced, the rent, insurance, property taxes in a manufacturing are the same. With variable costs the situation is different. They change as the number of units change. Typical variable costs include direct labor and direct materials. The variable cost times the number of units sold will equal the Total Variable Cost. Total Variable costs plus Fixed costs make up the total cost of production.
The formula to calculate the break-even point is: Break Even Point = Fixed Costs / (selling price-variable costs).
Ideally, a corporation should have a profit, which means that its sales calculation needs to include that variable in its forrnula: Sales = Variable Expenses + Fixed Expenses + Profit. To calculate the number of units of a product that it must sell in order to breakeven, the formula to calculate the break-even point becomes: Unit Selling Price X Number of Units Sold = (Unit Cost X Number Of Units Sold) + Fixed Costs + Profit, where X is the number of units that the corporation needs to sell to break even. For a $10.00 X = 5 X + 150.00 + 0
5X= (150.00 + 0)
X = ($150. 00 + 0) / 5
X = 30 Units.
Once the number of units is available it is easy to calculate the amount of sales to break even by multiplying the sales price of the product by the break even number of units. In this example this calculation is as follows:
Break Even Sales (Dollar Amount) = 30 Units x $5.00 per unit
Break-Even Sales (Dollar Amount) = $150.00
To prove it, simply do this:
Sales: 30 Units @ $10 = $300.00
Cost of the product 30 Units @ 5 = $150.00
Fixed cost (rent) $150.00
Selling less that 30 units will make this company incurr in a loss. The importance of knowing the break even point is never over emphasized. This simple exercise walks you through the process.