If you have several product ideas, the break-even point analysis helps you to assess with which product you will achieve a profit the fastest. If this is too high and cannot keep up with competing products, the ideas about sales volume are unrealistic and the product concept and/or pricing strategy must be adjusted. For example, if you have an idea of the minimum number of products you want to sell within a certain period of time in order to reach the break-even point, you can calculate how high you have to set the unit price for the product. The break-even point analysis can also help with pricing. Break Even Point in Accounting to help find the best product price This is the case when the break-even point is reached with a low sales volume. On the other hand, you can also see when a product has a very high efficiency. If it is unrealistic that the necessary sales volume can be achieved within a certain period of time, the product does not even need to be manufactured, or one should then think about adapting the product in order to increase the sales volume or reduce the costs. If the analysis shows, for example, that a large number of products must be sold in order to reach the break-even point, a product idea can be eliminated in advance. In the context of the break-even point analysis, companies assess whether the costs of a product justify the benefits (profit). Using the formulas and example above, we have seen how the break-even point can be used for corporate strategy purposes. With such an analysis, companies estimate how many products or services they need to sell until they can fully cover the costs with the proceeds. ![]() It can be applied to a single product as well as to a complete product range. If we know the contribution margin (£2 - £0.5 = £1.5) we can also calculate the break even point using this:īreak Even Point (sales) = £1,000 / £1.5 = 666.67 Break Even Point Analysisīreak-even point analysis is used to evaluate the efficiency of a product or service. The company must therefore sell at least 667 units per month to cover the fixed costs. We now calculate the break-even point in units:īreak Even Point (unit) = £1,000 / (£2 - £0.5) = 666.67 units Let's look at the above formulas with an example: To manufacture a product, a company incurs the following costs: The contribution margin is the amount with which the fixed costs are covered. The contribution margin is obtained with the following formula:Ĭontribution margin = product price - variable costs The above formula can also be expressed using the contribution margin:īreak Even Point (sales) = Fixed costs / contribution margin The break-even point thus indicates how many units must be sold in order to cover the costs. The turnover per unit is the selling price of the product. The fixed costs are independent of the number of units sold, while the variable unit costs are dependent on this. Break Even Point in units: formulaīreak Even Point (unit) = Fixed costs / (Revenue per unit - variable costs per unit) There are two ways to calculate the break-even point. The break-even point is the point where the two curves intersect. ![]() The same diagram is then used to draw the revenues that are achieved through the sale of a certain sales volume. On the x-axis (horizontal axis) you plot the sales volume (how many products are sold) and on the y-axis (vertical axis) you plot the total cost of producing a given quantity of product. To determine the break-even point graphically, the total cost curve of a product over time is plotted in a diagram. The break-even point can be determined both graphically and mathematically. From the point at which the break-even point is exceeded, the company makes a profit through the sale. This means that the break even point is exactly £0 in total. for the production of a product) are equal to the revenue generated by the sale. The break-even point indicates the point at which the costs (e.g. We explain in this article with the help of formulas and an example how to calculate the break-even point and how the break-even point analysis helps companies. It provides information about the sales volume from which a company makes a profit with the sale of a product. The break-even point is an important key figure in the cost-benefit calculation of a company.
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