The Break Even Point

Topics: Costs, Variable cost, Cost Pages: 4 (1144 words) Published: September 5, 2009
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...

References: • In this example, the firm would have to sell (1000 / (2.00 - 0.60) = 715) 715 units to break even. in that case the margin of safety value of NIL and the value of BEP is not profitable or not gaining loss.
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