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 Verfasst am: 12. Sep 2022 05:54 Titel: What is the Break-Even Point? |
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What is the Break-Even Point?
The Break-Even Point is the necessary level of output for a company’s revenue to be equal to its total costs – or said differently, the inflection point at which a company begins to generate a profit.To get more news about breakeven point (bep), you can visit wikifx.com official website.
How to Calculate the Break-Even Point
For all businesses owners, particularly during the earlier stages of a business, one of the most crucial questions to answer is: “When will my business break-even?”
All businesses share the similar goal of eventually becoming profitable in order to continue operating.An unprofitable business eventually runs out of cash on hand, and its operations can no longer be sustained (e.g., compensate employees, purchase inventory, office rent).
By understanding the required output to break even, a company can set revenue targets accordingly, as well as adjust its business strategy such as the pricing of its products/services and how it chooses to allocate its capital.
All incremental revenue beyond this point contributes toward the accumulation of more profits for the company.
Conducting a break-even analysis is a prerequisite to setting prices appropriately, establishing clear and logical sales target goals, and identifying weaknesses in the current state of the business model that could benefit from improvements (e.g., sales tactics, marketing strategy).
Furthermore, established companies with a diverse portfolio of product/service offerings can estimate the break-even point on an individualized product-level basis to assess whether adding a certain product would be economically viable.
Break-Even Point Formula
The formula for calculating the break-even point involves taking the total fixed costs and dividing the amount by the contribution margin per unit.
To take a step back, the contribution margin is the selling price per unit minus the variable costs per unit, and this metric represents the amount of revenue remaining after meeting all of the associated variable costs accumulated to generate that revenue.That said, when a company’s contribution margin (in dollar terms) is equal to its fixed costs, the company is at its break-even point.
If its contribution margin exceeds its fixed costs, then the company actually starts profiting from the sale of its products/services.
Break-Even Point Analysis Example (“Goal Seek”)
Let’s say that we have a company that sells products priced at $20.00 per unit, so revenue will be equal to the number of units sold multiplied by the $20.00 price tag.
In terms of its cost structure, the company has fixed costs (i.e., constant regardless of production volume) that amounts to $50k per year.Recall, fixed costs are independent of the sales volume for the given period, and include costs such as the monthly rent, the base employee salaries, and insurance.
Moving onto our final assumption, the variable costs directly associated with the production of the products being sold are $10.00.
In contrast to fixed costs, variable costs increase (or decrease) based on the number of units sold. If customer demand and sales are higher for the company in a certain period, its variable costs will also move in the same direction and increase (and vice versa). |
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