Break Even Analysis
Executive Summary
One of the most common tools used in evaluating the economic feasibility of a new enterprise or product is the Break even. The Break even point is the point at which revenue is exactly equal to costs. At this point, no profit is made and no losses are incurred. The break even point can be expressed in terms of unit sales or dollar sales. That is, the break even units indicate the level of sales that are required to cover costs. Sales above that number result in profit and sales below that number result in a loss. The break even sales indicate the dollars of gross sales required to break even. The determination of the break-even point of a firm is an important factor in assessing its profitability. It is a valuable control technique and a planning device in any business enterprise. It depicts the relation between total cost and total revenue at the level of a particular output. Ordinarily, the profit of an industrial unit depends upon the selling price of a product (revenue), volume of business (it depends on price) and cost price of the product.
A company has broken even when its total sales or revenues equal its total expenses. At the breakeven point, no profit has been made, nor have any losses been incurred. This calculation is critical for any business owner, because the breakeven point is the lower limit of profit when determining margins.
Defining Costs
There are several types of costs to consider when conducting a breakeven analysis, Fixed costs: These are costs that are the same regardless of how many items sold. All start-up costs, such as rent, insurance and computers, are considered fixed costs. Variable costs: These are recurring costs that are absorbed with each unit sold For example, if a company was operating a greeting card store where it had to buy greeting cards from a stationary company for $1 each, then that dollar represents a variable cost. As the business and sales grow, it can begin appropriating labor
One of the most common tools used in evaluating the economic feasibility of a new enterprise or product is the Break even. The Break even point is the point at which revenue is exactly equal to costs. At this point, no profit is made and no losses are incurred. The break even point can be expressed in terms of unit sales or dollar sales. That is, the break even units indicate the level of sales that are required to cover costs. Sales above that number result in profit and sales below that number result in a loss. The break even sales indicate the dollars of gross sales required to break even. The determination of the break-even point of a firm is an important factor in assessing its profitability. It is a valuable control technique and a planning device in any business enterprise. It depicts the relation between total cost and total revenue at the level of a particular output. Ordinarily, the profit of an industrial unit depends upon the selling price of a product (revenue), volume of business (it depends on price) and cost price of the product.
A company has broken even when its total sales or revenues equal its total expenses. At the breakeven point, no profit has been made, nor have any losses been incurred. This calculation is critical for any business owner, because the breakeven point is the lower limit of profit when determining margins.
Defining Costs
There are several types of costs to consider when conducting a breakeven analysis, Fixed costs: These are costs that are the same regardless of how many items sold. All start-up costs, such as rent, insurance and computers, are considered fixed costs. Variable costs: These are recurring costs that are absorbed with each unit sold For example, if a company was operating a greeting card store where it had to buy greeting cards from a stationary company for $1 each, then that dollar represents a variable cost. As the business and sales grow, it can begin appropriating labor