Breakeven Analysis
Breakeven Analysis
Breakeven Analysis
• DEFINITION
• IMPORTANCE OF BREAKEVEN POINT
• FACTORS TO BE CONSIDERED IN THE BEP
ANALYSIS
• CALCULATION OF BREAKEVEN POINT
THE CALCULATION METHOD
• Time - how long will you be in business to be able to start making profit?
• Units of sales – how many units of your product will you will be able to sell
before making profit?
• NOTE: (1) All three perspectives are inter-related, therefore, the choice of
which metric- time, units of sales, or sales volume – to adopt is personal.
• How many units the business must produce and sell in terms of
manufacturing business
• How many units to purchase and sell in the case of the merchandising
business
• In the services unit, the breakeven point indicates the number of billable
hours you must work in order to cover your costs.
BASIC FORMULA:
• Breakeven point = fixed costs/ (unit selling
price – variable costs).
CALCULATION OF BREAKEVEN
POINT
• REMEMBER:
AT BREAKEVEN POINT:
PROFIT = 0
LOSS = 0
PROFIT = LOSS
Revenues of the business are equal to its total
costs and its contribution margin equals its
total fixed costs.
CALCULATION OF BREAKEVEN
POINT
• TWO METHODS OF CALCULATING BREAKEVEN
POINT –
• px = vx + FC + Profit
Where,
p is the price per unit,
x is the number of units,
v is variable cost per unit and
FC is total fixed cost.
Calculation
EXAMPLE
SOLUTION
We have,
p = $15
v = $7, and
FC = $9,000
Substituting the known values into the formula for breakeven point
in sales units, we get:
Unit CM = p − v
Therefore,