Scribd
Upload
7 views1 page

Break-Even Analysis Explained

Break-even analysis determines the level of sales needed to cover total production costs. Total costs include fixed costs like rent and insurance, which do not change with sales. It also includes variable costs like materials and labor, which increase with sales. The break-even point is where total sales equals total costs, so there is no profit or loss. Sales above this point mean profit, while sales below mean loss. Break-even analysis helps owners determine profitability at different resource levels and whether to increase production. It is calculated by dividing total fixed costs by unit price minus variable cost per unit.

Uploaded by

jessica_rayner_2
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOC, PDF, TXT or read online on Scribd
7 views1 page

Break-Even Analysis Explained

Break-even analysis determines the level of sales needed to cover total production costs. Total costs include fixed costs like rent and insurance, which do not change with sales. It also includes variable costs like materials and labor, which increase with sales. The break-even point is where total sales equals total costs, so there is no profit or loss. Sales above this point mean profit, while sales below mean loss. Break-even analysis helps owners determine profitability at different resource levels and whether to increase production. It is calculated by dividing total fixed costs by unit price minus variable cost per unit.

Uploaded by

jessica_rayner_2
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOC, PDF, TXT or read online on Scribd

Break-Even Analysis What is it?

Is used to determine the level of sales that needs to be generated to cover the total cost of production Total cost of production includes: Fixed Costs costs that do not change regardless of how much is sold e.g. rent, insurance, rates, depreciation, interest on loans. Variable costs costs that depend on the amount of sales e.g. for every $1 of sales a business has estimated that 25c is variable costs. e.g. of variable cost are direct labour and materials, delivery, packaging, commission on sales. Break even point Total sales revenue equals total operating costs TR = TC breakeven (no profit/loss) Represent the level of sales that must be reached before any profit can be made. Sales about the break even point will mean a profit. TR > TC profit and TR < TC - loss Advantages It helps the owner to determine: The profitability at different combinations of resources Whether to increase the production FORMULA The break even sales quantity can be calculated by using the formula: Quantity (Q) = total fixed costs / unit price variable cost per unit EXAMPLE: New tennis racquet Unit Price - $200 Fixed Costs = $600 000 Variable Costs = $80 racquet The number of racquets which need to Q= 600000/200-80 = 5000 racquets This is the point where the sales = costs, so neither a profit not a loss.

You might also like