What Does Breakeven Analysis Mean?
Breakeven analysis refers to the process of determining a business’s break even point.
How it Works
When making sales, a business will incur expenses.
Some of these expenses will be fixed.
These costs remain the same no matter what happens with sales.
The other component of costs are variable expenses..
Variable expenses relate directly to sales and include such things as direct materials, commissions, piece rate labor.
These costs will vary as the level of sales varies.
The difference between sales and variable costs is known as the contribution margin.
This is how much money is available to the business after paying for variable costs.
To achieve break even, the contribution margin needs to equal fixed costs.
When determining sales break-even, you need to find at what level sales need to be for this to happen.
Determining Break Even
To determine break-even, begin by determining fixed costs.
Next, divide this by the contribution margin per sales unit (explained below)
This shows how many units have to be sold to break even.
Calculating Contribution Margin Per Sales Unit
To determine the contribution margin per sales unit, begin by determining the expected sales price of each unit.
From this, deduct the cost of producing each unit.
This will show the expected contribution margin for each unit produced.
Calculating Sales Break-Even
To calculate sales break-even, take the number of units needed to achieve break-even.
Then multiply this by the expected sales price.
This will show sales break-even.
© R.J. Hickman 2020