Explain break
even analysis & its calculator
Answer:
Break-even point:
The point at which total
of fired & variable costs of a business become equal to its total revenue
is known as break-even point.
Revenues
= variable cost
At
this point a business neither earns any profit nor suffers any loss it also
known as, no profit, no loss, or zero profit point.
Calculation
of break even point is important for every business because it tells business
owners & managers how much sale are needed to cover all fixed as well as
variable expenses of the business or the sale volume after which the business
will start generating profit. The computation of sales volume required to break
even is known as break-even analysis.
ü When there is
profit.
§ Revenue
> variable cost + fixed cost
ü At break point
§ Revenue
= variable cost + fixed cost
ü When there is a
loss.
§ Revenue
< variable cost + fixed cost
Calculation of break-even point
1)
Use
of equation method:
The
application of equation method facilitates the computation of break even point both in units and in
dollars.
Q = variable expenses + fixed
expenses
Sales price per unit
Q = Number (quantity) of units to be
manufactured & sold during the period
Suppose;
The annual fixed expenses to run the
business are $ 15,000 and variable expenses
are
$ 7.50 per unit sale price of your product is $ 15 per unit. The number of
units to be sold to break even
can be easily calculated using equation method.
Q = variable expenses + fixed
expenses
Sales price per unit
Q = Q7.5 + 15000
15
15Q
= 7.5Q + 15000
15Q
– 7.5 Q = 15000
7.5
Q = 15000
Q=
15000 / 7.5
Q=
2000 units
The break-even point in unit is 2000 units
and break even point in dollars are;
=2000 units x
$15
=
30,000
2) Use of
contribution margin method;
The method describe above
is equation method. Some people use another method
called contribution
margin method under this method; the total fixed expenses are divided
by contribution margin
per unit.
Consider the following
computations.
= Total fixed exp / Contribution margin per
unit
If
total fixed exp are 15000 and margin ration is 0.5 then.
=
$ 15000
0.5
=
30,000
Note:
0.5 = (15-7.5)
15
Graphical
presentation
The graphical
presentation of dollar and unit sales needed to break even is known as break even chart or cup graph;
Explanation:
With
the help of above graph, we can easily judge the break – even point and can
estimate the revenue and variable & fixed expenses. On the above diagram, the
“E” shows the break-even point, show the 1800 units at 11000 dollars.
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