Break Even Analysis In business planning, asking the proper questions and obtaining answers to those questions is arguably the most important thing. Questions such as; how much do we have to sell to reach our profit goal? How much do our sales need to increase in order to cover a planned increase in advertising costs? What price should we charge to cover our costs and allow for the planned profit goals? Is our business going to be profitable? Answers to such difficult questions become accessible with the utilization of the break even analysis. Break even analysis can be conceived arguably as one of the simplest tools in accounting; however, its simplicity does not take away from its importance. Break even analysis is used in …show more content…
In using the break even formula and plugging in the above numbers, we would determine how many units we would have to sell to break even, which in this specific case it would be 1,000 fence panels. This tells us that selling fewer than 1,000 fence panels would yield losses. Determining what the break even number is becomes very vital as we try to next project how long it will take to sell those 1,000 panels as the time it will take us to sell those panels would mean the amount of time we would have our money invested in and we would have to assess what impact having our money tied up in the production of those panels would have on the overall business and address whether we can even afford to have our money tied up into those fence panels for that specific amounts of time. In looking at the next possibility where we can use the break even analysis, it would involve the question of how to manufacture a product, in terms of the nature of operations and how it will affect fixed costs. In this instance, we as a company may have a good idea on the quantity expect, the likely selling price, and the variable costs involved, but be uncertain about how to structure the new operation. For example, if the volume expected to be 15,000 units, at a selling price of $5 and variable costs of $3, the break even equation tells us that the fixed costs cannot be greater
Breakeven Analysis for Product Tylenol Approach 1 - Same price as Tylenol Approach 2a - Cheaper than Tylenol Approach 2b - Cheaper w/lowered trade cost $ $ $ $ Unit Cost (Variable Cost) 0.60 0.60 0.60 0.60 Trade Cost (Selling Price to Retailers) $ 1.69 $ 1.69 $ 1.05 $ 0.70 Fixed Cost (Advertising) 2,000,000 6,000,000 6,000,000 6,000,000 Break-Even Quantity [Fixed Cost/(Trade Cost-Unit Cost)] 1,834,862 5,504,587 13,333,333 60,000,000 Contribution Margin (Unit) 64% 64% 43% 14%
In order to calculate the breakeven point, we use the following equation and budget data:
Although the financial goal is to create profit, we need to calculate the breakeven point to get started.
5. Determine the necessary sales in unit and dollars to break-even or attain desired profit using the break-even formula.
Determine the unit break-even point, assuming fixed costs are $60,000 per period, variable costs are $16.00 per unit, and the sales price is $25.00 per unit.
Based on the Excel Problem of chapter one, if the total capacity for this business is 725 will you stay in it? If you want to stay in it what price you need to obtain a break even point of 725?
The purpose of break-even analysis is to determine the number of units of a product to sell that will
There are some limitations of break-even as well. For example, it cannot give accurate results if the data used for it is predicted. Data such as change in direct cost
When you give a financial report, it should include all the tools your organization will need for making a good financial decision. In general, when completing an analysis for a financial decision the management team needs to evaluate the possible new venture, start planning
This question gives students an opportunity to exercise their ability to interpret break-even analyses. Key teaching points should include explaining the preparation of a break-even chart, the interpretation of the break-even volume (938,799 hectoliters [HL]), and the comparison of the break-even volume to the current volume (1,173,000 HL). Another key point is that the chart in case Exhibit 5 is relevant only for the current cost structure of the company—if variable costs increase or the plant expansion is approved, the break-even volume will rise. Finally, students should be aided in understanding that “break-even” refers to operating profit, not free cash flow. The typical use of the break-even chart ignores taxes, investments, and the depreciation tax shield.
Break-even point analysis is a measurement system that calculates the margin of safety by comparing the amount of revenues or units that must be sold to cover fixed and variable costs associated with making the sales. In other words, it’s a way to calculate when a project will be profitable by equating its total revenues with its total expenses. There are several different uses for the equation, but all of them deal with managerial accounting and cost management (Break-Even Point, n.d.)
The internal sales data showed that the business would need $45,000 in monthly revenue to break even. The sales forecast which have been prepared keep in mind a 65% gross margin, however, based on actual figure for 2009, this target has not been reached, and the forecasted sales have fallen.
Break even analysis can be used to decide whether to alter the existing product emphasis or not. For example in this case, if we refer last year’s data, we can see that the product C is not economically feasible to manufacture at $2.40 / unit. Following table gives the analysis for checking whether the company can afford to invest in additional “C” capacity.
Breakeven = fixed cost/margin = total dollar fixed costs/ unit selling price –unit variable costs
While cost is seldom the only criterion used in a make-or-buy decision, simple break-even analysis can be an effective way to quickly surmise the