The point in which total cost and total revenue are equal Show
What is Break Even Analysis?Break Even Analysis in economics, business, and cost accounting refers to the point in which total cost and total revenue are equal. A break even point analysis is used to determine the number of units or dollars of revenue needed to cover total costs (fixed and variable costs). Image: CFI’s Budgeting & Forecasting Course. Formula for Break Even AnalysisThe formula for break even analysis is as follows: Break Even Quantity = Fixed Costs / (Sales Price per Unit – Variable Cost Per Unit) Where:
It is also helpful to note that sales price per unit minus variable cost per unit is the contribution margin per unit. For example, if a book’s selling price is $100 and its variable costs are $5 to make the book, $95 is the contribution margin per unit and contributes to offsetting the fixed costs. Example of Break Even AnalysisColin is the managerial accountant in charge of Company A, which sells water bottles. He previously determined that the fixed costs of Company A consist of property taxes, a lease, and executive salaries, which add up to $100,000. The variable cost associated with producing one water bottle is $2 per unit. The water bottle is sold at a premium price of $12. To determine the break even point of Company A’s premium water bottle: Break Even Quantity = $100,000 / ($12 – $2) = 10,000 Therefore, given the fixed costs, variable costs, and selling price of the water bottles, Company A would need to sell 10,000 units of water bottles to break even. For more information about variable costs, check out the following video: Graphically Representing the Break Even PointThe graphical representation of unit sales and dollar sales needed to break even is referred to as the break even chart or Cost Volume Profit (CVP) graph. Below is the CVP graph of the example above: Explanation:
Download the Free TemplateEnter your name and email in the form below and download the free template now! CVP Analysis TemplateDownload the free Excel template now to advance your finance knowledge! Interpretation of Break Even AnalysisAs illustrated in the graph above, the point at which total fixed and variable costs are equal to total revenues is known as the break even point. At the break even point, a business does not make a profit or loss. Therefore, the break even point is often referred to as the “no-profit” or “no-loss point.” The break even analysis is important to business owners and managers in determining how many units (or revenues) are needed to cover fixed and variable expenses of the business. Therefore, the concept of break even point is as follows:
Sensitivity AnalysisBreak even analysis is often a component of sensitivity analysis and scenario analysis performed in financial modeling. Using Goal Seek in Excel, an analyst can backsolve how many units need to be sold, at what price, and at what cost to break even. Image: CFI’s Financial Modeling Course. Related ReadingsCFI is a leading provider of financial analysis courses and financial analyst certification programs for investment banking, equity research, and financial planning and analysis (FP&A) professionals. To help you advance your career, check out the additional CFI resources below:
What is the vertical distance between total cost and total variable cost?The vertical distance between ATC and AVC curves is equal to AFC, as illustrated by the two arrows. The shape of the ATC curve combines the shapes of the AFC and AVC curves. As productivity decreases, costs rise.
Where the total cost line crosses the total revenue line is?Where the total revenue line crosses the total costs line is the break-even point (ie costs and revenue are the same). Everything below this point is produced at a loss, and everything above it is produced at a profit.
When the line for total cost and the line for total revenue intersect on a graph the point of intersection is called the?The point where the total cost and revenue lines intersect is the break-even point. The amount of profit or loss at different output levels is represented by the distance between the total cost and total revenue lines. Figure 1 shows a typical break-even chart for Company A.
When constructing a CVP graph the vertical axis represents?In a CVP graph, unit volume is usually represented on the horizontal (X) axis and dollars on the vertical (Y) axis. Draw a line parallel to the volume axis to represent total fixed expenses. Choose some sales volume, say 400 units, and plot the point representing total expenses (fixed and variable).
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