How to calculate the break- even point?

(Finance, Accounting, Taxes & creative knowledge)

 

Calculations the break- even point

Managers are interested in the amount of contribution a product makes to its fixed costs. These fixed costs must be met, irrespective of whatever level of output the business is making and selling. Calculate the contribution that each product makes towards meeting the fixed costs by:

Selling price-variable cost = contribution

When enough individual contribution has been made, the business’s fixed costs will be covered (paid): this is its break –even point.

In our example, selling price is rs. 3 and variable cost 50p. The contribution is :

Rs3-50p=rs 2.50.

Each item sold contributes rs.2.50 towards the rs 10000 fixed costs. Calculate the break –even point by dividing the unit contribution into total fixed costs. This shows that 4000 is as we have seen from the chart, the break-even point.

 

Total fixed costs/ Unit contribution =Rs 10000/Rs 2.50 = Rs 4000

The profit or loss at each level of production / sales can also be calculated. For example, sales of 3000 give a total contribution of Rs. 7500(3000*2.50). the fixed costs are still rs. 10000, so at this level of sales the company would be making a loss of rs. 2500.

The usefulness of break – even analysis

Break –even analysis provides information about how many items a business must sell at a certain price before making a profit. The effect of changing figures such as the price can be assessed through the effect on the break- even point and margin of safety.

Break-even analysis does have limitations. Its information might be inaccurate or out of date because it analysis the situation at a particular time only. It is of limited use for services industries that do not make product, and for multiproduct businesses, because it because difficult to calculate the various costs for individual products. It also assumes.

*all output is sold , and sold at the same price-this is often not so for example , all the output may not be sold and a business might lower the product price to sell more of them.

*variable costs per unit stay constant – in practice cost may fall for example , through economies of scale such as bulk buying.

*fixed costs stay fixed – they are fixed only within a certain output , for example, if another building is rented when output grows , this increases the fixed costs. 

Key words:

*Beyond the break –even out a profit is made; before it, a loss is made.

* It shown how many items a business must sell at a certain price before making a profit.

* It is of limited use for services industries that do not make product, and for multiproduct businesses.

* The profit or loss at each level of production / sales can also be calculated.

*its analysis no profits no loss condition of business.

*up to the amount of break-even point consider as profit

*below to amount of break – even point consider as loss.

*it’s important to define no profit and no loss condition of business in particular period of time.

*if we want to calculated break-even point need to know fixed and variable cost of business production.