It is an important analysis for us to have and understand. For any new business, we should predict what gross sales volume level we will have to achieve before we reach the break-even point and then, of course, build to make a profit. For early-stage businesses, we should be able to assess our early prediction and determine how accurate we were, and monitor whether we are actually on track to make the profits we need. Even the mature business would be wise to look at their current break-even point and perhaps find ways to lower that benchmark to increase profits. The recent massive layoffs at large corporations are directed at this goal, lowering the break-even point and increasing profits.
Break-Even Is the Volume Where All Fixed Expenses Are Covered
We will start a break-even analysis by establishing all the fixed (overhead) expenses of our business.
For the purpose of a model break-even, let’s assume that the fixed expenses look as follows:
Administrative salaries -430,000
Rent-220,000
Utilities - 80,000
Insurance- 20,000
Taxes-30,000
Telephone- 35,000
Auto expense- 20,000
Supplies- 15,000
Sales and marketing- 350,000
Interest - 20,000
Miscellaneous-100,000
Total - 1320,000
These are the expenses that must be covered by your gross profit. Assuming that the gross profit margin is 60 percent, what volume must you have to cover this expense? The answer in this case is 2,200,000 — 60 percent of that amount is 1,320,000 which is your target number.
This Is Not a
Although the financial goal is to create profit, we need to calculate the breakeven point to get started.
In our second assumption, instead of using the cost of goods per cases in 1986, we try to use the percentage it counts in the total expenses which is 50.4% and to find the sales needed to break-even. The detail of the calculation is shown in the answer for questions d. The result is that 95,635, a little bit higher than the estimated sales of 90,000.
Break-even Dollar Volume = Total Fixed Costs / Contribution Margin = $525,000 / 0.7111 = $738,282.40
A common use of the Gross Margin is to estimate a company’s breakeven sales volume.(Higgins,2012)
In this assignment, I will evaluate the reliability of break-even analysis in estimating budgeted activity levels for a selected organisation.
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.
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.)
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.
Breakeven = fixed cost/margin = total dollar fixed costs/ unit selling price –unit variable costs
Cost-Volume-Profit (CVP) analysis is an important tool for managerial decision-making. CVP analysis “is the examination of the relationships among selling prices, sales and production volume, costs, expenses, and profits” (Warren, Reeve, & Duchac, 2014, p. 970). When performing a CVP analysis fixed costs, variable costs, contribution margins, and break-even points are required.
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
Break-even point in total sales dollars =(Fixed expenses)/(CM ratios) = (400,000)/(0.5466) = 732,000 $ (Rounded)
Sales…………………………... $1.33 Variable Costs (25%)……….. $0.33 Contribution Margin (75%)... $1.00 Incremental Fixed Cost……. $1.00 Profit……………………..……. $0.00
The concept of break-even stated that volume that is lower than break-even point, a loss is expected. Meanwhile, volume at higher than break-even, a profit is expected[4]. Therefore, Hospital Supply, Inc. should produce at least 1,882 units in order not to incur any losses.
The second piece of information that is necessary is the margin. This relates to the breakeven point, in that the margin is the markup over the cost of producing something. The margin is what delivers the contribution to fixed costs, so it is important to maximize margin wherever possible. Furthermore, a strong gross margin is going to be related to a strong net margin, so the better the margin from the outset the better the results for the company will be.