Break Even Analysis
Breakeven analysis is a powerful management tool, and one that is critical in planning, decision-making, and expense control. Breakeven analysis can be invaluable in determining whether to buy or lease, expand into a new area, build a new plant, and many other such considerations. Breakeven analysis can also show the impact on your business of changing your price structure. As the price goes down (and so your gross margin goes down), breakeven shoots up - usually very rapidly. Breakeven analysis will not force a decision, of course, but it will provide you with additional insights into the effects of important business decisions on your bottom line.
Breakeven refers to the level of sales necessary to cover all
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Any close decision will probably be affected by other factors in addition to these calculations anyway.
Once you know the level of sales you have to reach before making a profit, you can evaluate the reasonableness of this target. What are the odds of reaching this breakeven sales level? One way to test this is to convert the gross dollar sales needed for breakeven into some other unit which can then be compared against the capacity of the business or the size of the market. If the breakeven occurs at or near the capacity of the business, or if your analysis shows that you must capture all (or more than all) of the available target market, the feasibility of your concept is suspect, and the odds of business success are loaded against you.
Another way to use breakeven analysis is to change the variables in the equation. If fixed or variable expenses can be reduced, the breakeven point will go down. If prices can be increased without hurting sales (and without increasing costs), the breakeven point will go down. This is an excellent way to experiment with different alternatives. Clearly, this is a subjective process - but then, so is the rest of business analysis. The purpose is to make your business decision making as reasonable as possible. Breakeven analysis can be one of the most valuable tools at your disposal for this
Determine the unit break-even point, assuming fixed costs are $60,000 per period, variable costs are $16.00 per unit, and the sales price is $25.00 per unit.
5. Determine the necessary sales in unit and dollars to break-even or attain desired profit using the break-even formula.
In order to calculate the breakeven point, we use the following equation and budget data:
Although the financial goal is to create profit, we need to calculate the breakeven point to get started.
There are some limitations of break-even as well. For example, it cannot give accurate results if the data used for it is predicted. Data such as change in direct cost
Breakeven Analysis for Product Tylenol Approach 1 - Same price as Tylenol Approach 2a - Cheaper than Tylenol Approach 2b - Cheaper w/lowered trade cost $ $ $ $ Unit Cost (Variable Cost) 0.60 0.60 0.60 0.60 Trade Cost (Selling Price to Retailers) $ 1.69 $ 1.69 $ 1.05 $ 0.70 Fixed Cost (Advertising) 2,000,000 6,000,000 6,000,000 6,000,000 Break-Even Quantity [Fixed Cost/(Trade Cost-Unit Cost)] 1,834,862 5,504,587 13,333,333 60,000,000 Contribution Margin (Unit) 64% 64% 43% 14%
This question gives students an opportunity to exercise their ability to interpret break-even analyses. Key teaching points should include explaining the preparation of a break-even chart, the interpretation of the break-even volume (938,799 hectoliters [HL]), and the comparison of the break-even volume to the current volume (1,173,000 HL). Another key point is that the chart in case Exhibit 5 is relevant only for the current cost structure of the company—if variable costs increase or the plant expansion is approved, the break-even volume will rise. Finally, students should be aided in understanding that “break-even” refers to operating profit, not free cash flow. The typical use of the break-even chart ignores taxes, investments, and the depreciation tax shield.
Breakeven = fixed cost/margin = total dollar fixed costs/ unit selling price –unit variable costs
The internal sales data showed that the business would need $45,000 in monthly revenue to break even. The sales forecast which have been prepared keep in mind a 65% gross margin, however, based on actual figure for 2009, this target has not been reached, and the forecasted sales have fallen.
The percentage Breakeven Sales Change can be calculated simply by dividing the unit sales change by the initial sales level, or may be calculated more directly with the following expression:
Senior executives at Vanguard are evaluating their marketing strategy. In particular, they are looking at their approach to market segmentation, the organization of the marketing function, and the emphasis placed on marketing metrics in the corporate dashboard in light of an economic and stock market downturn.
While cost is seldom the only criterion used in a make-or-buy decision, simple break-even analysis can be an effective way to quickly surmise the
A company's break-even point is the amount of sales or revenues that it must generate in order to equal its expenses. In other words, it is the point at which the company neither makes a profit nor suffers a loss. Calculating the break-even point (through break-even analysis) can provide a simple, yet powerful quantitative tool for managers. In its simplest form, break-even analysis provides insight into whether or not revenue from a product or service has the ability to cover the relevant costs of production of that product or service. Managers can use this information in making a wide range of business decisions, including setting prices, preparing competitive bids, and applying for loans.
After identifying the sales targets, the strategies, tactics and actions to achieve them can be worked on. Gluck (2014), mentions that to identify underlying strategies and increase sales, a business can break into a new market segment by adapting an existing product or boosting the average sale per customer by using add-on sales or upselling premium features. When developing the sales strategies, the market segment, customers' motivations and expectations, and the capacity to meet customers' expectations should be considered.
Break-even point analysis is a measurement system that calculates the margin of safety by comparing the amount of revenues or units that must be sold to cover fixed and variable costs associated with making the sales. In other words, it’s a way to calculate when a project will be profitable by equating its total revenues with its total expenses. There are several different uses for the equation, but all of them deal with managerial accounting and cost management (Break-Even Point, n.d.)