Break even analysis
A breakeven analysis helps firms to ascertain the sales volume that their trade needs to reach for firms to make profits. This analysis is beneficial when one is planning the pricing policy, especially when a firm develops its marketing plan for a new product. Breakeven analysis merely uses a mathematical formula to ascertain exact sales levels to ensure that the firms’ net sales are equal to the net operating expenses. Thus, breakeven point in mathematical terms = Total Expenses = Net Sales Revenue.
The number of units, at which any firm will attain its break-even point, can be calculated with the following formula:
Total Revenue = Total Cost
Price per unit x number of units sold = Fixed cost + variable cost x number of units sold
Number of units sold = Fixed cost
Price per unit – variable cost
By doing a complete break even analysis, companies can know the perfect pricing structure. There are some limitations of this method, which restrict its use by financial analysts. There are many assumptions, like the fixed costs being constant, the products produced are considered equal to products sold, and ratio between various product lines is not taken into account. Also, it just takes the supply side metrics into account.
Significance of Breakeven Point
Breakeven analysis assists owners to ascertain at what point they would earn a profit after recovering the expenses. This also helps them to price the product accordingly. Comparison of break even points within the same sector is beneficial as the costs – fixed and variable – are similar across industries in contrast to different industries. If a company has failed to do the breakeven analysis properly, then it may have to change the entire marketing and pricing strategy. Do not neglect its importance and trust only the most expert team for helping you in analysing the breakeven point. You can access an experienced team by sending us a query. Write to us and we will send you a personalised quote in an hour.
1) Calculate the break-even point from the given information:
|Price per unit (p)||$30|
|Variable cost per unit (v)||$18|
|Total fixed cost (fc)||$12,000|
|Breakeven point in units = 12000 /(30-18)= 12000/12= 1000 units|
|Breakeven in Dollars = $18*1000= $18,000|
2) How many cakes must Brownie Hearts sell to earn their profits?
|Fixed Cost||$ 10,000|
|Price per cake||$50|
|Breakeven point in cakes = 10000/(50-10)= 1000/40= 400|