Break Even Point
Break Even Point
Break Even Point
EVEN
POINT
Analysis
Definition
A decision-making aid that enables a
manager to determine whether a
particular volume of sales will result in
losses or profits
A way to calculate when a project will
be profitable by equating its total
revenues with its total expenses
Uses
✖ C-V-P analysis is an important tool in
terms of short-term planning and
decision making
✖ It looks at the relationship between
costs, revenue, output levels and profit
✖ Short run decisions where C-V-P is
used include choice of sales mix,
pricing policy etc.
Revenue
P (X) = F + V (X)
Total costs
WHERE:
F = FIXED COSTS
X = VOLUME OF OUTPUT (IN UNITS)
V = VARIABLE COSTS
P = PRICE PER UNIT
CONTRIBUTION MARGIN
Where:
P = Price per product
V = Variable cost per product
EXAMPLE
Company XYZ sells a product for $100 each. The
company incurs a unit variable direct material
expense of $12, unit variable labor of $25, $10 of
variable overhead per unit and $8 of fixed overhead
per unit
= Sales price – Variable Costs
= $100 – ($12 + 25 + 10)
= $53