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Encyclopedia > Break even analysis

The break even point for a product is the point where total revenue received equals total costs associated with the sale of the product (TR=TC). 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 analyze the potential profitability of an expenditure in a sales-based business. The breakeven point in economics is the point at which cost or expenses and income are equal - there is no net loss or gain, one has broken even. The point at which a firm or other economic entity breaks even is equal to its fixed costs divided by its contribution... Wall Street, Manhattan is the location of the New York Stock Exchange and is often used as a symbol for the world of business. ...

Contents

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, 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
profit equation: Profit = Revenues - Costs where
Revenues = (selling price * quantity of product) and
Costs = (average variable costs * quantity) + total fixed costs. Therefore,
Profit=(selling price*quantity)-(average variable costs*quantity+total fixed costs).
Solving for Quantity of product at the breakeven point when Profit equals zero,
the quantity of product at breakeven is Total fixed costs / (selling price - average variable costs).

Firms may still decide not to sell low-profit products, for example those not fitting well into their sales mix. Firms may also sell products that lose money - as a loss leader, to offer a complete line of products, etc. But if a product does not break even, or a potential product looks like it clearly will not sell better than the break even point, then the firm will not sell, or will stop selling, that product.


An example:

  • Assume we are selling a product for $2 each.
  • Assume that the variable cost associated with producing and selling the product is 60 cents.
  • Assume that the fixed cost related to the product (the basic costs that are incurred in operating the business even if no product is produced) is $1000.
  • In this example, the firm would have to sell (1000/(2.00 - 0.60) = 714) 714 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.

In price changes

By inserting different prices into the formula, you will obtain a number of break even points, one for each possible price charged. If the firm changes the selling price for its product, from $2 to $2.30, in the example above, then it would have to sell only (1000/(2.3 - 0.6))= 589 units to break even, rather than 714.

To make the results clearer, they can be graphed. To do this, you draw the total cost curve (TC in the diagram) which shows the total cost associated with each possible level of output, the fixed cost curve (FC) which show





s the costs that do not vary with output level, and finally the various total revenue lines (R1, R2, and R3) which show the total amount of revenue received at each output level, given the price you will be charging. break even analysis - multiple prices File history Legend: (cur) = this is the current file, (del) = delete this old version, (rev) = revert to this old version. ...


The break even points (A,B,C) are the points of intersection between the total cost curve (TC) and a total revenue curve (R1, R2, or R3). The break even quantity at each selling price can be read off the horizontal, axis and the break even price at each selling price can be read off the vertical axis. The total cost, total revenue, and fixed cost curves can each be constructed with simple formulae. For example, the total revenue curve is simply the product of selling price times quantity for each output quantity. The data used in these formulae come either from accounting records or from various estimation techniques such as regression analysis.


In statistics, regression analysis examines the relation of a dependent variable (response variable) to specified independent variables (predictors). ...


Limitations

  • Break-even analysis is only a supply side (ie.: costs only) analysis, as it tells you nothing about what sales are actually likely to be for the product at these various prices.
  • It assumes that fixed costs (FC) are constant
  • It assumes average variable costs are constant per unit of output, at least in the range of likely quantities of sales.
  • It assumes that the quantity of goods produced is equal to the quantity of goods sold (i.e., there is no change in the quantity of goods held in inventory at the beginning of the period and the quantity of goods held in inventory at the end of the period.
  • In multi-product companies, it assumes that the relative proportions of each product sold and produced are constant (i.e., the sales mix is constant).

External links

Further reading:

  • Break-even Point Fixed and variable expenses, contribution margin, desired profit.

See also : cost-plus pricing, pricing, production, costs, and pricing Cost-plus pricing is a pricing method commonly used by firms. ... This article or section does not adequately cite its references or sources. ... This article or section does not cite any references or sources. ...


  Results from FactBites:
 
The Break-Even Calculator (848 words)
On the surface, break-even analysis is a tool to calculate at which sales volume the variable and fixed costs of producing your product will be recovered.
Another way to look at it is that the break-even point is the point at which your product stops costing you money to produce and sell, and starts to generate a profit for your company.
Lucky for you, another MBA partner has been doing additional research and discovered that because Clevelanders are concerned with their health, they are willing to pay up to $2.79 for a gourmet burger of the top quality you propose.
Break even analysis - Wikipedia, the free encyclopedia (558 words)
The break even point for a product is the point where total revenue received equals total costs associated with the sale of the product (TR=TC).
The break even points (A,B,C) are the points of intersection between the total cost curve (TC) and a total revenue curve (R1, R2, or R3).
The break even quantity at each selling price can be read off the horizontal, axis and the break even price at each selling price can be read off the vertical axis.
  More results at FactBites »

 
 

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