The break-even point for a product is the point where total revenue received equals the total costs associated with the sale of the product (TR=TC). [1]A break-even point is typically calculated in order for businesses to determine if it would be profitable to sell a proposed product, as opposed to attempting to modify an existing product instead so it can be made lucrative. Break even analysis can also be used to analyse the potential profitability of an expenditure in a sales-based business. break even point (for output) = fixed cost / contribution per unit contribution (p.u) = selling price (p.u) - variable cost (p.u) break even point (for sales) = fixed cost / contribution (pu) * sp (pu)

|Contents |
|[hide] |
|1 Margin of Safety |
|2 In unit sales |
|3 In capital budgeting |
|4 Internet research |
|5 Limitations |
|6 References |
|7 Bibliography |
|8 External links |

[pic][edit] Margin of Safety

Margin of safety represents the strength of the business. It enables a business to know that what is the exact amount he/ she has gained or lost over or below the break even point).[2]

Margin of safety = (( sales - break-even sales) / sales) x 100% If P/V ratio is given then sales/pv ratio

[edit] In unit sales

If the product can be sold in a larger quantity than occurs at the break even point, then the firm will make a profit; below this point, the firm will make a loss. Break-even quantity is calculated by: Total fixed costs / (selling price - average variable costs). Explanation - in the denominator, "price minus average variable cost" is the variable profit per unit, or contribution margin of each unit that is sold. This relationship is derived from the...

...BREAK-EVENPOINT
A company's break-evenpoint is the amount of sales or revenues that it must generate in order to equal its expenses. In other words, it is the point at which the company neither makes a profit nor suffers a loss. Calculating the break-evenpoint (through break-even analysis) can provide a simple, yet powerful quantitative tool for managers. In its simplest form, break-even analysis provides insight into whether or not revenue from a product or service has the ability to cover the relevant costs of production of that product or service. Managers can use this information in making a wide range of business decisions, including setting prices, preparing competitive bids, and applying for loans.
BACKGROUND
The break-evenpoint has its origins in the economic concept of the "point of indifference." From an economic perspective, this point indicates the quantity of some good at which the decision maker would be indifferent, i.e., would be satisfied, without reason to celebrate or to opine. At this quantity, the costs and benefits are precisely balanced.
Similarly, the managerial concept of break-even analysis seeks to find the quantity of...

...Calculating the break-evenpoint
To avoid making a loss every business must at least break-even by achieving a level of sales that covers its total costs. But what level of sales is necessary to break-even?
To explore the concept of break-even, we need to define some basic terms:
Fixed costs: Costs that do not vary with output or sales e.g. managers salaries, rent and rates on business premises.
Variable costs: Costs that vary with the quantity produced or sold e.g. costs of materials and wages
Total cost: Fixed costs plus variable costs for any possible level of output.
Sales revenue: The price of the product multiplied by total sales
Profit: The difference between total revenue and total cost (where revenues are higher than costs
Loss: The difference between total revenue and total cost (where costs are higher than revenues)
Selling very small quantities of a product usually results in a loss as any profit fails to cover the overheads or fixed costs of the business.
For example, suppose that the fixed costs (eg management salaries, rent, business rates) for a firm making bookshelves are £1 000 per month. Assume that the varaible cost (materials and labour) for each set of shelves is £30. This means that £20 is generated by each sale (called the 'contribution') towards paying the fixed costs. It follows,...

...Definition of BreakEvenpoint:
Breakevenpoint is the level of sales at which profit is zero. According to this definition, at breakevenpoint sales are equal to fixed cost plus variable cost. This concept is further explained by the the following equation:
[Breakeven sales = fixed cost + variable cost]
The breakevenpoint can be calculated using either the equation method or contribution margin method. These two methods are equivalent.
Equation Method:
The equation method centers on the contribution approach to the income statement. The format of this statement can be expressed in equation form as follows:
Profit = (Sales − Variable expenses) − Fixed expenses
Rearranging this equation slightly yields the following equation, which is widely used in cost volume profit (CVP) analysis:
Sales = Variable expenses + Fixed expenses + Profit
According to the definition of breakevenpoint, breakevenpoint is the level of sales where profits are zero. Therefore the breakevenpoint can be computed by finding that point where sales just equal the total of the variable expenses plus fixed expenses and profit is zero.
Example:
For...

...ADC Info #3
Break-Even Analysis
Rob Holland Assistant Extension Specialist Agricultural Development Center
September 1998
One of the most common tools used in evaluating the economic feasibility of a new enterprise or product is the break-even analysis. The break-evenpoint 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-evenpoint 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 indicates the dollars of gross sales required to break-even. It is important to realize that a company will not necessarily produce a product just because it is expected to breakeven. Many times, a certain level of profitability or return on investment is desired. If this objective cannot be reached, which may mean selling a substantial number of units above break-even, the product may not be produced. However, the break-even is an excellent tool to help quantify the level of production needed for a new...

...common stockholders.
15-2. Financial leverage is financing a portion of the firm's assets with securities bearing a fixed (limited) rate of return. Anytime the firm uses preferred stock to finance assets, financial leverage is employed.
15-3. Operating leverage is the use of operating fixed costs in the firm's cost structure. When operating leverage is present, any percentage fluctuation in sales will result in a greater percentage fluctuation in EBIT.
15-4.Break-even analysis, as it is typically presented, categorizes all operating costs as being either fixed or variable. Based upon this division of costs, the break-evenpoint is computed. The computation procedure for the cash break-evenpoint omits any noncash expenses that the firm might incur. Typical examples of noncash expenses include depreciation and prepaid expenses. The ordinary break-evenpoint will always exceed the cash break-evenpoint, provided some noncash charges are present.
15-5. The most important shortcomings of break-even analysis are:
(1) The cost-volume-profit relationship is assumed to be linear over the entire range of output.
(2) All of the firm's production is assumed to be saleable at the fixed selling price.
(3) The sales mix...

...Break-evenpoint is that point at which there is neither profit nor loss. It is at point costs are equal to sales. It is otherwise called as balancing point, neutral point, equilibrium point, loss ending point, profit beginning point etc. After BEP is achieved, all the further sales will contribute to profit.
At BEP, Sales – Variable cost = Fixed costs. OR Contribution = Fixed costs.
Break-even analysis
Break-even analysis is an analytical technique that is used to determine the probable profit at any level of production. It is basically an extension of marginal costing.
Break-even chart
--------------------------
Advantages of Break-even analysis
1. Profit planning
2. Product planning
3. Activity Planning
4. Lease Decisions
5. Make or buy decisions
6. Capital profit decisions
7. Distribution channel decisions
8. Price decisions
9. Choosing Promotion Mix
10. Decision regarding profitability of products or department.
Some basic assumptions of breakeven analysis are:-
1. All costs are classified into fixed and variable costs.
2. The sales mix always remains constant.
3. There is no change in the general price level.
4. The sole influencing...

...Contribution Margin and BreakEvenPoint
by
ACC 202
Trident University
July 22, 2011
Contribution Margin and BreakEvenPoint
I’m going to discuss Contribution margin and what it is and how it relates to companies and profits. Contribution margin is the amount remaining from sales revenue after variable expenses have been deducted. It is the amount available to cover fixed expenses such as lease agreements and then to provide profits for the period. Contribution margin is first used to cover the fixed expenses and then whatever remains go towards profits of the share holders. If the contribution margin is not sufficient to cover the fixed expenses that a company has then a loss occurs for the period. Contribution margin analysis is a tool used to differentiate by cost/volume/profit analysis. Contribution margin is total revenue minus total variable cost. This difference can be expressed as a percentage of total revenue. A company's contribution margin can be expressed as the percentage of each sale that remains after the variable costs such as advertising and lease payments are subtracted. Given the contribution margin, a company president can make better decisions about whether to add or subtract a product line, about how to price a product or service, and about how to structure sales commissions or bonuses. The contribution margin is computed using income statement that...

...methods used for solving systems of equations? Which method do you prefer to use?
b) Break-Even Analysis – Systems of Equations Application Problem
Suppose a company produces and sells pizzas as its product. Its revenue is the money generates by selling x number of pizzas. Its cost is the cost of producing x number of pizzas.
Revenue Function: R(x) = selling price per pizza(x)
Cost Function: C(x) = fixed cost + cost per unit produced(x)
The point of intersection on a graph of each function is called the break-evenpoint. We can also find the break-evenpoint using the Substitution Method.
Suppose Dan’s Pizza Parlor has a fixed cost of $280 and it costs $4 to produce each pizza. Dan sells every pizza for $12.
The Revenue Function is: R(x) = 12x
The Cost Function is: C(x) = 280 + 4x
The break-evenpoint occurs where the graphs of C and R intersect. Therefore, we can find this point by solving the system:
y =12x
y = 280 + 4x
How many pizzas does Dan have to produce to break-even? If he exceeds his break-evenpoint, will he make a profit or have a loss?
A) What are the three methods used for solving systems of equations? Which method do you prefer to use? graphing, substitution, and elimination. I use all there but I...

279 Words |
2 Pages

Share this Document

{"hostname":"studymode.com","essaysImgCdnUrl":"\/\/images-study.netdna-ssl.com\/pi\/","useDefaultThumbs":true,"defaultThumbImgs":["\/\/stm-study.netdna-ssl.com\/stm\/images\/placeholders\/default_paper_1.png","\/\/stm-study.netdna-ssl.com\/stm\/images\/placeholders\/default_paper_2.png","\/\/stm-study.netdna-ssl.com\/stm\/images\/placeholders\/default_paper_3.png","\/\/stm-study.netdna-ssl.com\/stm\/images\/placeholders\/default_paper_4.png","\/\/stm-study.netdna-ssl.com\/stm\/images\/placeholders\/default_paper_5.png"],"thumb_default_size":"160x220","thumb_ac_size":"80x110","isPayOrJoin":false,"essayUpload":false,"site_id":1,"autoComplete":false,"isPremiumCountry":false,"userCountryCode":"RU","logPixelPath":"\/\/www.smhpix.com\/pixel.gif","tracking_url":"\/\/www.smhpix.com\/pixel.gif","cookies":{"unlimitedBanner":"off"},"essay":{"essayId":33442981,"categoryName":"Fiction","categoryParentId":"17","currentPage":1,"format":"text","pageMeta":{"text":{"startPage":1,"endPage":4,"pageRange":"1-4","totalPages":4}},"access":"premium","title":"The Break Even Point","additionalIds":[3,7,93,19],"additional":["Business \u0026 Economy","Education","Education\/Greek System","Natural Sciences"],"loadedPages":{"html":[],"text":[1,2,3,4]}},"user":null,"canonicalUrl":"http:\/\/www.studymode.com\/essays\/The-Break-Even-Point-229707.html","pagesPerLoad":50,"userType":"member_guest","ct":10,"ndocs":"1,500,000","pdocs":"6,000","cc":"10_PERCENT_1MO_AND_6MO","signUpUrl":"https:\/\/www.studymode.com\/signup\/","joinUrl":"https:\/\/www.studymode.com\/join","payPlanUrl":"\/checkout\/pay","upgradeUrl":"\/checkout\/upgrade","freeTrialUrl":"https:\/\/www.studymode.com\/signup\/?redirectUrl=https%3A%2F%2Fwww.studymode.com%2Fcheckout%2Fpay%2Ffree-trial\u0026bypassPaymentPage=1","showModal":"get-access","showModalUrl":"https:\/\/www.studymode.com\/signup\/?redirectUrl=https%3A%2F%2Fwww.studymode.com%2Fjoin","joinFreeUrl":"\/essays\/?newuser=1","siteId":1,"facebook":{"clientId":"306058689489023","version":"v2.8","language":"en_US"}}