Breakeven Analysis
What Does Breakeven Analysis Mean?
Breakeven analysis refers to the process of determining a business’s break even point.
![bea 1](https://seeaccountingnow.online/wp-content/uploads/2021/08/bea-1.jpg)
How it Works
When making sales, a business will incur expenses.
![bea 2](https://seeaccountingnow.online/wp-content/uploads/2021/08/bea-2.jpg)
Fixed Costs
Some of these expenses will be fixed.
![bea 3](https://seeaccountingnow.online/wp-content/uploads/2021/08/bea-3.jpg)
These costs remain the same no matter what happens with sales.
![bea 5](https://seeaccountingnow.online/wp-content/uploads/2021/08/bea-5.jpg)
Variable Costs
The other component of costs are variable expenses..
![bea 6](https://seeaccountingnow.online/wp-content/uploads/2021/08/bea-6.jpg)
Variable expenses relate directly to sales and include such things as direct materials, commissions, piece rate labor.
![bea 7](https://seeaccountingnow.online/wp-content/uploads/2021/08/bea-7.jpg)
These costs will vary as the level of sales varies.
![bea 8](https://seeaccountingnow.online/wp-content/uploads/2021/08/bea-8.jpg)
Contribution Margin
The difference between sales and variable costs is known as the contribution margin.
![bea 9](https://seeaccountingnow.online/wp-content/uploads/2021/08/bea-9.jpg)
This is how much money is available to the business after paying for variable costs.
![bea 10](https://seeaccountingnow.online/wp-content/uploads/2021/08/bea-10.jpg)
To achieve break even, the contribution margin needs to equal fixed costs.
![bea 11](https://seeaccountingnow.online/wp-content/uploads/2021/08/bea-11.jpg)
When determining sales break-even, you need to find at what level sales need to be for this to happen.
![bea 12](https://seeaccountingnow.online/wp-content/uploads/2021/08/bea-12.jpg)
Determining Break Even
To determine break-even, begin by determining fixed costs.
![bea 13](https://seeaccountingnow.online/wp-content/uploads/2021/08/bea-13.jpg)
Next, divide this by the contribution margin per sales unit (explained below)
![bea 14](https://seeaccountingnow.online/wp-content/uploads/2021/08/bea-14.jpg)
This shows how many units have to be sold to break even.
![bea 15](https://seeaccountingnow.online/wp-content/uploads/2021/08/bea-15.jpg)
Calculating Contribution Margin Per Sales Unit
To determine the contribution margin per sales unit, begin by determining the expected sales price of each unit.
![bea 16](https://seeaccountingnow.online/wp-content/uploads/2021/08/bea-16.jpg)
From this, deduct the cost of producing each unit.
![bea 17](https://seeaccountingnow.online/wp-content/uploads/2021/08/bea-17.jpg)
This will show the expected contribution margin for each unit produced.
![bea 18](https://seeaccountingnow.online/wp-content/uploads/2021/08/bea-18.jpg)
Calculating Sales Break-Even
To calculate sales break-even, take the number of units needed to achieve break-even.
![bea 19](https://seeaccountingnow.online/wp-content/uploads/2021/08/bea-19.jpg)
Then multiply this by the expected sales price.
![bea 20](https://seeaccountingnow.online/wp-content/uploads/2021/08/bea-20.jpg)
This will show sales break-even.
![bea 21](https://seeaccountingnow.online/wp-content/uploads/2021/08/bea-21.jpg)
© R.J. Hickman 2020