Updated on September 13, 2022 Show
A breakeven analysis determines the sales volume your business needs to start making a profit, based on your fixed costs, variable costs, and selling price. It often is used in conjunction with a sales forecast when developing a pricing strategy, either as part of a marketing plan or a business plan. The formula for a breakeven analysis is: Fixed costs/(Revenue per unit-Variable costs per unit) Fixed CostsFixed costs are expenses that must be paid whether or not any units are produced. They are fixed over a specified period of time or range of production, and examples include:
Fixed costs are easy to calculate for existing businesses, but new businesses must do research to get the most accurate figures available. Variable CostsUnit costs vary depending on the number of products produced and other factors. For instance, the cost of the materials needed and the labor used to produce units isn't always the same. Examples of variable costs include:
Sample ComputationSuppose that your fixed costs for producing 30,000 widgets are $30,000 a year. Your variable costs are $2.20 for materials, $4 for labor, and $0.80 for overhead for a total of $7. If you choose a selling price of $12.00 for each widget, then: $30,000/($12-$7)=6,000 units. This means that selling 6,000 widgets at $12 apiece covers your costs of $30,000. Each unit sold beyond 6,000 generates $5 worth of profit. A sample breakdown leading to this calculation might look soething like this:
Using BreakEven CalculationsA breakeven analysis allows you to apply various scenarios to your breakeven point and possibly increase profits. Some reasons to calculate the analysis include:
How is the contribution margin calculated?How Do You Calculate Contribution Margin? Contribution margin is calculated as Revenue - Variable Costs. The contribution margin ratio is calculated as (Revenue - Variable Costs) / Revenue.
How do you calculate variable expense ratio?Variable expense ratio expresses variable expenses as a proportion of a company's sales. To calculate the variable expense ratio, simply divide the company's total variable expenses by the company's total net sales. To express the result as a percentage, simply multiply it by 100.
Which of the following is needed to calculate profit?Finding profit is simple using this formula: Total Revenue - Total Expenses = Profit.
Which of the following are factors that affect profits in cost volume profit analysis?Cost-volume-profit (CVP) analysis focuses on how profits are affected by the following five factors:. Selling prices.. Sales volume.. Unit variable costs.. Total fixed costs.. Mix of products sold.. |