Break-Even Point Analysis Definition
Break-Even Point Analysis is the measuring ratio which is used for the calculation of margin of safety. It gets by the comparing of the total amount of revenue or units which must be sold to the cover fixed and variable cost of the sales.
In simple word, we can say that it is a way from which we calculate the business is profitable when we equate the total revenue with total expenses.
Break-Even Point Analysis Calculation
Calculation of this equation mostly deals by the managerial account or cost management.
In managerial accounting, it is necessary to understand revenue and profits. Al the revenue is not the profit for the company.
Making the cost of many products is more than revenue which means that the expenses are greater as compare to the revenue generated.
So on that product which has great expanses then revenue there is the loss for the company instead of profit.
Break-Even Point Analysis formula is used to calculate the number of sales which used to equate the revenue to expenses and excess of revenue (profit) after getting of fixed and variable cost.
From the below example you can seek how to calculate Break-Even Point Analysis.
Break-Even Point Analysis Formula
We can get Break-Even Point by dividing the fixed cost of the production by the difference of sales price per unit and variable cost per unit that is
Break-even point in units = Fixed cost/sales price per unit – variable cost per unit
As the difference of sales price per unit and variable cost per unit is called contribution margin per unit. So we can modify the equation more as
Break-Even Point in Units = Fixed cost/contribution margin per unit
The above formula used for the calculations of the total number of units which sold in order for the company and generate the revenue for the company greater than the expenses.
Through this, we get the concept and then we can convert it into the sales dollars.
When we multiply the sales price per units with Break-Even Point per unit then we get the Break-Even Point in Dollars that is
Break-Even Point in dollars = sales price per unit x Break-Even Point in units
This will give the total amount of sales need in dollars which need for the company to achieve the goal of zero profit zero loss.
After that for the profitability calculation, that number of units required to achieve the certain profit level without using Break-Even calculator.
First, we divide the dollar amount of profit by contribution margin per unit then we add break even point number in it to get the number of units to produce desire profit.
Break-Even Point Analysis Example
Now we take the example on the basis of these formulas. clark is the managerial accountant in the company.
Clark is not sure about the couch model of the cover year that turn it into the profit. what number of unit factory produce and sell it to cover all expenses and turn into the profit of $500,000.
Production of that company is here.
Total fixedcost= $500,000.
Variable cost per unit= $300.
Sale price unit= $500.
Desired profit= $200,000.
First, we find the Break-Even Point that’s why we divide the fixed cost of $500,000. by the contribution margin which is $200= (500 – $300)
So it is clear from the above calculation that Clark’s factory sells 2500 units to cover the fixed cost and variable cost. Now the fixed cost is cover so on the sell of above 2500 units will go to CM.
Now Clark calculates the total sales units in the form of total sales dollars by doing the following calculation.
$1,250,000=2500 unit x %500 per units
So from this, it is clear to the Clark that the company must sell 500 units or $1,250,000 equipment before any profit realizes.
Now after that calculation company wants to get a profit of $200,000 For which Clark use the Break-Even Point calculator.
This goal can get by dividing the desired profit by contribution margin then adding this result in Break-Even Point units.
3500 units=(200,000)/(500 -300)
So for the above mention company profit, 3500 units require to be sell. For your business as a template, you can use Break-Even Point.
From the above result, you observe that you can use the Break-Even Point Analysis in different ways. From this managing department easily aware that how to fix their covering cost and variable cost. That’s why they change the element in order to minimize to units to produce the profitability for the company.
If we take an example that the company increases $50 on the sales of every couch of company. then it creates a great effect on the number of units that how many units require to sell before profitability.
This change also makes the cause for the change the value of variable cost. If the variable cost is low then it means that it equates to greater profit per unit production and due to this total number reduce which require muse produce.
Due to the outsourcing cost structure also change.
The margin of safety is the important concept in Break-Even Point Analysis. That is the difference between the number of units which are required to achieve the goal of profit and for the covering of expensive required unit sold.
If we study the above example of Clark’s company then in this company for covering the expenditure of the company 2500 units need to sell whereas to get the profit of $200,000 company needs to sell 3500 units.
This Difference of (3500 -2500)=1000 units is called the safety of margin. This hundred 1000 unit if the loss of the company then company only cover its expenditure but not profit.
From the fixed cost most advance Break-Even analysis calculator subtracts the non-cash expenses to calculate the level of Break-Even Point cash flow.
For more understanding of Financial Ratios Check:
Asset Turnover Ratio