Calculation of the break even point for break even analysis

Break-even Analysis: A break-even analysis includes the analysis of the cost and revenue data of the project, and using this tool, it is possible to determine the point at which revenue equals cost, as well as the expected gain or loss under different production volumes.

1. Enterprises conduct balance analysis at different organizational levels. At the highest level, top management uses break-even analysis as a strategic planning tool. For example:

Automakers can use break-even analysis to estimate the expected profit or loss on a series of car sales. If the analysis indicates a unit break-even point.

If there is an increase from the previous estimate, then the department or business unit can develop a cost-cutting strategy to estimate the break-even point of a new product line using the break-even technique.

2. Prepare for negotiations. Break-even analysis allows the buyer to ** the seller's pricing strategy during negotiations.

Studies have shown that there is a direct relationship between readout preparation and negotiation effectiveness.

When using a balance-of-payments analysis, it is common to use certain common assumptions:

1) Fixed costs for the period and quantity under consideration.

Remain the same. 2) Variable costs.

fluctuates in a linear fashion, although this is not always the case.

3) The total revenue line that slopes upwards from the starting point is graphically represented by the direct change of revenue with the sales volume.

4) Fixed costs and variable costs include semi-variable costs, so there is no semi-variable cost line.

5) The break-even analysis considers the total cost, not the average cost. However, the technique typically uses the average selling price of a project to calculate the total return line.

6) Significant joint costs between departments or products limit the use of this technology if these costs are not reasonably allocated to users. If shared costs can't be amortized, a break-even analysis is best suited for the entire operation, rather than individual departments, products, or product lines.

7) This technique only considers the quantity factor. If qualitative factors are more important, management is based on income and expenditure.

Calculation of the break-even point:

Formula: BEP = TFC (SUP - VCUP).

Note: BEP = Break-Even Point TFC = Total Fixed Costs VCUP = Variable Costs per Unit of Production SUP = Selling Price Per Unit of Production

Break-even point

The so-called break-even point means that the manufacturer has no economic profit.

But the equilibrium point at which normal profits can be achieved is the marginal cost.

The intersection with the average cost.

Formula: BEP = TFC (SUP - VCUP)Notes: BEP = Break-Even Point TFC = Total Fixed Costs vCup = Variable Costs Per Unit of Production SUP = Selling Price Per Unit of Production

Break-even pointThe so-called break-even point refers to the equilibrium point at which the manufacturer has no economic profit but can achieve normal profit, which is the intersection of marginal cost and average cost.

In drawing up the budget, it is necessary to adhere to the principle of balancing revenue and expenditure and keeping income within the limits of income. In the event of a discrepancy between revenue and expenditure under certain extraordinary circumstances, timely measures should be taken to increase revenues, reduce expenditures, and issue public bonds in order to achieve a balance between budget and expenditure.

In the implementation of the budget, it is necessary to strengthen tax collection and management, prevent the loss of revenue, strictly control expenditures, and increase financial funds.

to ensure the balance of fiscal revenues and expenditures.

When compiling and examining the final accounts, it is necessary to strictly verify all revenues and expenditures, resolutely collect the uncollected revenues that should be receivable, handle the withdrawal of revenues that should be returned to the treasury in a timely manner, and include all expenditures in the final accounts in strict accordance with regulations, so as to eliminate the situation of false fiscal revenues and eliminate the situation of false fiscal revenues, so as to achieve a true balance between fiscal revenues and expenditures.

Q: I know how to calculate the break-even point for a single product company, but if I'm selling multiple products, how should I calculate it? My company sells two products, a chair and a bar stool, which cost $50 each.

The variable cost per seat is $25, the variable cost of a bar chair is $20, and the company's monthly fixed cost is $20,000. If the sales ratio is 1:1 (one bar stool for every seat sold), what is the break-even point for sales and the number of seating bar stools sold?

A: In one of my previous articles, I discussed a simple formula for calculating the break-even point: break-even = fixed costs Gross profit margin, the fixed cost is the same every month and does not change with sales (e.g. rent, employee salaries, etc.), the gross profit margin of the product is the profit divided by **.

This simple formula only works for a single product company, so it is very simple to calculate the gross profit of a single product. However, if there are other additional products in the sales mix, then the calculation is not so simple. The break-even formula itself has not changed.

Simple gross profit margins can no longer be used here, and gross profit margins must be calculated as a "weighted average", which is calculated by multiplying the gross profit margin of a single product by its percentage of sales. Let's look at your example specifically, the gross profit margin for a seat is 50% :(50-25) 50.

The gross profit margin for bar stools is 60% :(50-20) 50. Each product constitutes 50% of the company's sales mix.

Then, the weighted average gross profit margin is:

Seat: 50% x 50% = 25%.

Bar stool: 60% x 50% = 30%.

Gross margin weighted average = 55% (25% +30%)

This weighted average is then applied to the break-even formula, i.e., break-even = $20,00055 = $36,363。

To calculate the sales volume for each product, multiply the break-even sales by the product's sales component and divide by **:

Bar stool sales = $36,363 x 50% $50 = 363 bar stools.

Seat sales = $36,363 x 50% $50 = 363 seats.

As can be seen from the above example, changes in the composition of sales affect the break-even point. For example, if the company were to sell 70% of its bar stools and 30% of its seats, the break-even point would fall to $35,088 because the weighted average gross margin would rise to 57%. Conversely, if the company were to sell 30% of its bar chairs and 70% of its seats, the break-even point would increase to $37,736 as the weighted average gross margin dropped to 53%.

As an entrepreneur, your goal is to keep the break-even point to a minimum. Product**, product cost, product quantity, and fixed costs are not only factors that affect the break-even point, but are also the determining factors for the ultimate success of a business.