The number that a business needs to cross in order to make a profit is called the break-even point. It is very important to know the break-even point of a business as it provides guidance by letting it known that how much revenue should be generated by a business to get profit.
Calculation of break-even point can be quite unpredictable as any change in the variation leads to difficulties in locking accurate figures. To get real life examples of break-even point, students can search for links like break-even analysis homework answers online.
The relation between revenues and expenses is explored by an analysis called the break-even analysis. The operational cost involved to run a business is termed as the expense whereas the earning generated by sale of products or services is called revenue. Break-even analysis is a very important part of understanding the profit that a firm makes. Thus there are few factors that need to be known in order to do proper break-even analysis.
5 points about break-even analysis
Since break-even analysis is related to expense, thus understanding the different type of expenses is very important.
- Types of expenses –
- Variable expenses
Variable expenses are connected to the revenues. It is directly proportional to revenues, growth in revenue causes growth in variable expenses similarly, drop in revenue causes drop in variable expenses.Variable cost is generally spent on materials that are required to manufacture the products to be sold. Examples could be shipping charges, disposal methods, sales tax, etc.
- Fixed expenses
Fixed expenses are the stagnant expenses; they do not rise or fall in accordance to revenues. Examples of fixed cost could be the rent. The rent of an office of the organization does not change with any change in the revenue from the business.
- Mixed expenses
These are those expenses that are fixed at times and variables at other times.Generally the variable part of mixed expenses is placed with variable expenses, and the fixed part is placed with fixed expenses. Break-even analysis serves as the best method to divide the parts of mixed expenses. Links like break-even analysis homework answers online can give more examples of types of expenses.
- Equation of contribution margin
The amount that is obtained by selling one unit of a particular product after covering the total variable cost required for producing that product is called the contribution margin. The formula for the contribution margin is as follows –
CONTRIBUTION MARGIN PER UNIT = REVENUE PER UNIT – VARIABLE EXPENSES PER UNIT
The following example can bring more clarity to the topic,
If the following are per unit variable costs of the mentioned parameters,
Materials = $15; Sales commissions = @ 9; Waste disposal charge = $2; Shipping cost = $4
Then the total variable cost per unit is $15 + $9 + $2 + $4 = $30
Variable cost of producing one unit of the product is $30. If the product is sold for $110, then,
Contribution margin = $110 (revenue) – $30 (variable expenses) = $80
More such examples can be obtained and practiced by searching break-even analysis homework answers online.
- Break-even point equation
Once the contribution margin is known, the knowledge of fixed expenses can help to calculate the break-even point. The break-even equation is as follows –
BREAK-EVEN POINT IN UNITS PER DAY = FIXED EXPENSES PER DAY / CONTRIBUTION MARGIN PER UNIT
The following example can be used for better understanding,
If the following are the fixed costs of the following parameters per day,
Rent = $110; Utilities = $90; Hourly wages = $220; Depreciation = $140
Then the total fixed expenses per day is $110 + $90 + $220 + $140 = $560
Now since we know that the fixed expenses per day are $560, then
Break-even point = $560 / $80 = 8
Thus, the company needs to sell eight units of the product per day to meet its expenses. Each unit that is sold over eight units is profit to the company. More such examples can be solved by searching for break-even analysis homework answers online.
- Profit desired
If one wants a fixed salary from profit or requires money for certain improvements, knowledge of the break-even point can help to fix goals as per requirement. Analysts can determine the number of units that are required to be sold to achieve the required targets of business by adding the required amount to the fixed costs. In case there is a requirement of draw an amount of $480 per day in salary.
Using this condition, one can add $480 to the fixed cost i.e. $560, so, the newly fixed expense per day becomes $1040.
If the break-even equation is run again using the newly fixed expense,
The new break-even point becomes, $1040 / $80 = 13 units
Thus selling thirteen units per day will help a business meet all its expenses and also keep the salary or meet business requirements. Each unit sold after thirteen units will bring profit to the company. Online search for break-even analysis
- Break-even point in revenue form
The break-even point can be determined in the form of revenue dollars instead of per unit. This can be done if the firm’s fixed cost is divided by the contribution margin ratio i.e. contribution ration divide by revenue.
In the mentioned example Contribution margin ratio should be $80 / $110 = $0.73 (73%)
Since the contribution margin ratio is 73%, thus, the break-even point in revenue dollars can be calculated as follows,
Break-even ration in revenue dollars = $560 / 73% – $767 approximately
Thus to cover the company’s expenses, they must make at least $767 per day in revenue.
These are the five major points of break-even analysis that should be known in order to solve problems on the topic. Online links like break-even analysis homework answers can also be used to clarify the concept on the topic. Since, break-even analysis is a major part of the study and has a lot many applications in finding profitability of a business, so students should always try to keep their concept clear.