Breakeven Analysis—Fixed Cost, Variable Cost, & ProfitUpdated on September 13, 2022 Show
A breakeven analysis determines the sales volume your business needs to start making a profit, based on your fixed costs, variable costs, and selling price. It often is used in conjunction with a sales forecast when developing a pricing strategy, either as part of a marketing plan or a business plan. The formula for a breakeven analysis is: Fixed costs/(Revenue per unit-Variable costs per unit) Fixed CostsFixed costs are expenses that must be paid whether or not any units are produced. They are fixed over a specified period of time or range of production, and examples include:
Fixed costs are easy to calculate for existing businesses, but new businesses must do research to get the most accurate figures available. Variable CostsUnit costs vary depending on the number of products produced and other factors. For instance, the cost of the materials needed and the labor used to produce units isn't always the same. Examples of variable costs include:
Sample ComputationSuppose that your fixed costs for producing 30,000 widgets are $30,000 a year. Your variable costs are $2.20 for materials, $4 for labor, and $0.80 for overhead for a total of $7. If you choose a selling price of $12.00 for each widget, then: $30,000/($12-$7)=6,000 units. This means that selling 6,000 widgets at $12 apiece covers your costs of $30,000. Each unit sold beyond 6,000 generates $5 worth of profit. A sample breakdown leading to this calculation might look soething like this:
Using BreakEven CalculationsA breakeven analysis allows you to apply various scenarios to your breakeven point and possibly increase profits. Some reasons to calculate the analysis include:
Which cost is not change with production of production?A cost which does not change with the change in the level of production is known as a fixed cost — for example, rent of a building or salary of a manager.
Which of the following refers to the costs of production that vary depending on the number of units produced?A variable cost is a corporate expense that changes in proportion to how much a company produces or sells. Variable costs increase or decrease depending on a company's production or sales volume—they rise as production increases and fall as production decreases.
What are costs that do not change called?Fixed costs do not vary with the number of goods or services a company produces over the short term. For example, suppose a company leases a machine for production for two years.
Which of the following refers to an amount added to the cost of a product to create the price?Definition: Mark up refers to the value that a player adds to the cost price of a product. The value added is called the mark-up. The mark-up added to the cost price usually equals retail price.
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