Volume is the only factor that causes a change in selling price and cost per unit.(Again, there might be circumstances leading to an increase or reduction in selling price per unit) Selling price per unit remains constant at all activity levels.Variable cost per unit remains constant over any activity range (Although, there might be discounts available from suppliers on bulk purchases).Fixed costs always remain constant in total at all levels of activity (However, there might be step-ups and step-downs in fixed costs at different activity levels).In reality, this might not be possible as some of the inventory is unsold at the end of the period and forms a part of closing stock. This method assumes that 100% of the production is converted into sales and no closing stock is left.Limitations of Break-even analysisĪlthough break-even analysis gives an estimate of minimum sales needed to avoid a loss, it has some limitations that limit its utility in certain cases. To calculate the break-even point, we need two things:įixed cost is given in the question, i.e., $150,000. Calculate the breakeven point in terms of units of perfume required as well as in terms of the sales revenue? Solution The selling price of each bottle of perfume is $34 and the variable cost is $19. The management of Scents n Stories has estimated that fixed costs for the whole business amount to $150,000. Use contribution to sales ratio to determine the break-even point with the help of following formula:īreak-even point ($) = Total fixed costs / Contribution to sales ratio ExampleĬonsider the example of Scents n Stories, a perfume manufacturing company.Multiply the break-even point (units) by the selling price per unit, OR.To find the break-even point in terms of sales revenue, there are two methods (whichever is suitable for you): It can also be proved as follows: Formula – Break-even in $ Using the break-even point formula, you can calculate that 12,500 units ($100,000 / $8 per unit) are required to cover the fixed costs of the company resulting in no profit and no loss. Now the main question is, “how many units would be sufficient to cover fixed costs?”. It means each product is contributing $8 to cover fixed costs. Now, you can calculate the contribution each unit generates by deducting the variable costs per unit from the selling price per unit. Only one product, GX100, is manufactured by the company that has a selling price of $20. The management of the company has estimated that the total fixed costs of the business are $100,000. To understand the concept of break-even point, let us take the example of Paragon Manufacturing Limited. Total contribution = Contribution per unit x number of units soldĬontribution per unit x number of units sold = Total fixed costsīreak-even point (Units) = Total fixed costs / Contribution per unit Explanation – Break-even analysis Break-even analysis helps in making decisions regarding the production and sales of a product that is needed to break even.īreak-even point (Units) = Total fixed costs / Contribution per unit.Businesses with low fixed costs tend to have a low break-even point of sales and vice versa.At the Break-even point, the total revenue of the business covers the total cost or the total contribution = total fixed costs.Another way of putting this is that the contribution earned (revenue – variable costs) by the business is just enough to cover the fixed costs. At the break-even point, the total revenue of the business covers the total costs. What is break-even point?īreak-even point is the point where the business experiences no profit and no loss i.e., the business breaks even. However, we will consider the single product break-even analysis in this article. Break-even analysis can be used for a single product or multiple products. It is a useful tool to estimate how much sales are needed by the business to avoid a loss. Break-even analysis is the method used to calculate the break-even point of the business.
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