Breakeven Analysis

It is very easy and basic concept of business world. When I started with1st semester of my business education without having any prior knowledge or background of business studies, it took me time to digest this and its graphs. But now it seems just like a piece of cake thing and very basic.

It simply says the point of sales when there is no profit no loss situation. It’s a simple relationship between costs, sales and profit. When sales are covering the costs incurred. Neither you are earning any profit nor bearing any loss but the revenue is covering all the costs.
Now let’s have a look at its formula:

To calculate breakeven point (where sales are covering costs), you need to know the unit price of the product being sold, lets denote it with P, variable cost per that is VC and total fixed cost lets say it TFC. So we can say:

                                    BE = TFC/P-VC

For more understanding lets figure this formula out using some hypothetical numbers, suppose we are producing pens. Per unit cost is $ 7 and variable cost per unit is $4. Now by subtracting P-VC ($7-$4) we get $3 in this case. Say annual TFC is $300 then breakeven point can be computed as $300/$7-$4= 100 units. $100X$7=$700 that is revenue. And $400+$300=$700 that is total cost. So 100 units of pen will be enough to cover all costs.

So this way you can easily calculate how much volume you should produce, to what amount it should be increased or decreased.


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