Break Even Point And How To Calculate It

When you are running or managing a business at a smaller level, you are dealing with small figures and the number of clients is also limited too. However as you most past the small business standard and enter into the big market, things start changing around you. The evaluation techniques and methods used in past become outdated, the data management tools are no longer effective for huge number of sales and clients and of course, you need more man power equipped with better computing technology to run business smoothly.
For a business owner/ manager, it is important to know how different costs and values will behave once the number of sales and contracts expand. There is a method used in economics called cost-volume-profit analysis that studies the interrelationship of sales, net income and costs. In most of the planning decisions, this analysis plays a vital role. The main reason behind this analysis is to determine how the values of costs and profit change when there is change in volume of sales. This study is termed as Break Even Point Analysis. With the help of this evaluation, businesses can get a better understanding of how things will work out if they adapt a particular course of action.

In business, there are two types of costs. One is a fixed cost and the other is variable cost. Fixed costs are those costs that don’t change even if there is change in the volume of sales but on the other hand, variable costs are dependent on the volume of sales. If the sale volume decreases, the variable cost increases and if sale volume increases, the value of costs decreases.

Let’s assume that a toys company “A” is selling its toys on a retail stand that is located at “B” mall and they want to expand their market. The company is looking to enter into a new mall named “C” so they can expand their sales but for that reason, they have to negotiate on a lease of retail stand. Considering the lease price and other expenses, company has to determine its pricing and they come up with following plan

Selling Price Per Toy: 20 (100%); Variable Expense: 10 (50%) ; Contribution Margin: 10 (50%) ; Fixed Expenses: $700.

Before entering into a lease contract wit
h “B” mall, the Toy Company “A” will have to answer certain questions before making such kind of decision.

Break-Even Point Computation

Q: What would be the Break Even Point of company in terms of number of Toys sold and dollar of sales?
While evaluating the break even point, the revenue is considered equal to the costs, no profits or losses are considered as well.

Unit contribution approach is used in this case in which each piece of toy sold contributes a certain value to the fixed costs. A toy sells for $20, variable expense is $10 and contribution to fixed cost is $10 too.
Total fixed cost is $700 so if we divide this figure by $10 ($700 / $10), we get a sale volume of 70. This means that the break even point of company is 70. The company can only start generating profit after selling 70 toys each month.

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How to Calculate Break Even Point (Formula)

In order to conduct a break even analysis and to identify a break even point for your business you need to forecast your costs and sales in an accurate manner. In order to break even a company must have its total sales or revenue equals to its total expenses. Break even analysis is critical for a business as break even point determines the lower limit of profits while defining the margins.

Several types of costs may be required to conduct the break even analysis of a business however the two most important types of costs are the fixed costs and the variable costs. Fixed costs are the costs that remain the same regardless the number of units produced or sold. Variable costs are the recurring costs and are associated with the each unit you sell or produce. In order to calculate break even point you need to set the price per unit so that you can calculate the approximate revenue that you are going to having after selling the specific number of units. If you have the above mentioned figures then its really easy to calculate the break even point with the help of the formula.

Break Even Point =Fixed Costs/ (Selling price per unit – Variable Costs)

Let’s review an example of calculating break even point with the help of formula mentioned above
Fixed Costs
Monthly Rent                                                                                                        $100
Insurance Expenses per month ($600 per year= 600/12)                           $50
Total Fixed Costs per Month                                                                              $150
Variable Costs
Production Material                                                                                            $3
Labor Cost                                                                                                             $4
Total Variable Costs                                                                                             $7
Selling Price per Unit                                                                                          $10
Break Even Point= Fixed Costs/ (Selling Price – Variable Cost)
Break Even Point= 150/ (10 – 7)
Break Even Point= 150/3
Break Even Point = 50
This means that in order to achieve break even point the business must sell 50 units each month. After having broken even the profit and loss statement of the business will look like as shown below:-
Gross Sales                                         ($10 per unit times 50 units)        $500
Less Cost of Goods Sold                ($7 per unit times 50 units)              $350
Net Sales                                                                                               $150
Rent                                                                                                        $100
Insurance                                                                                                 $50
Total Expense                                                                                          $150
Net Profit                                                                                                            $0
After achieving break even point profit increases on every unit sold by the amount that is called unit contribution margin. Contribution margin per unit can be calculated by subtracting per unit variable cost from the selling price of a unit. 

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