Training guide to break even analysis.
What is breakeven analysis?
Break even analysis is a calculation to show at what point you are making no profit or loss, so it is when a businesses total revenue covers total costs so it is to show how much output you will have to produce to cover your total costs, within a business. Break even is usually shown in the form of a graph. To work out the break even point of a business you need 3 important components which are:
1. Fixed costs, which are not usually associated with production- these are costs that are at a set price and will not change if income is high or low e.g. Rent and insurance.
2. Variable costs- these are costs that change depending on amount of use and output of sales and the capacity of production e.g. Electricity, parts and materials.
The fixed costs and the variable costs amount to the total costs.
3. Selling price- The price at which they are going to sell their product or service.
When you have calculated break even and found the point at which it is you can then work out where your margin of safety is. Margin of safety is where a business can see at which point they will start making a loss, so on a break even graph the margin of safety would be at the break even point and above as if they went below the break even point they would start to make a loss.
Below there is a break even graph, this will help you to understand break even. As you can see the break even point is represented with the letter P and it is the total revenue line in the blue and the total costs line in the red that cross to give the break even point. If the business goes below the dotted break even line then they will be making a loss but if they are over the break even line they will be in profit. The straight line in the grey at the bottom represents the fixed costs.
www.tutor2u.net The site that the graph is from.
Break evens uses;
1. It can be used to show how much output the business will have to produce to cover the total costs.
2. It may be used to set production aims e.g. the business needs to increase production etc. It can be used to set aims and objectives to reach break even or to make a percentage of profit over break even in a certain amount of time and it can monitor these aims.
Table C projects the break even analysis in both units and dollars as a basis for further projections. As seen in Table C substantially larger sales are required to break even.
The 3 percent decline in sales causing a 21 percent decline in profits can be attributed to the identification of the accounting concept of operating leverage. Operating leverage is what business managers apply to boost small changes in revenue into sizable changes in profitability. Fixed cost is the force managers use to attain disproportionate changes between revenue and profitability. Therefore, when all costs are fixed every sales dollar contributes one dollar toward the potential profitability of a project. Once sales dollars cover fixed costs, each additional sales dollar represents pure profit. A small change in sales volume can significantly affect profitability (Edmonds, Tsay, & Olds, 2011). So, therefore, if sales volume increases,
About $25.77 million dollars will be needed to break even. Since the total sales from 1997 were $287 million, there would need to be an increase of 8.98% in sales to breakeven. Looking at the domestic sales from 1997, it equaled to $191.3 million, therefore, an increase of 13.47% would be needed to
1) Total Variable Costs are 60% of Total Costs; While the other 40% are from fixed costs.
BEP as an analysis which determines when total revenues equals total costs (fixed & variable). This analysis expresses the point when the organisation experiences no income or loss.
A variable cost is a cost of labor, material or overhead that changes according to the change in the volume (InvestorWords, 2008). Variable costs often include labor expenses and raw material costs, because labor and raw material usually must be increased to increase output. When production is zero, the variable cost is equal to zero. Some examples of variable costs would be cost of goods sold, shipping charges, cost of direct materials or supplies and wages of part-time or temporary staff. While the total variable cost changes with increased production, the total fixed costs stay the same.
Fixed cost is high for the container shipping industry such as vessel fees, container fees, and labor of loading and unloading. Variable cost is fuel cost, because the volatility of fuel price, so there is a potential huge impact on industry’s profit.
The estimated cost of setting up the business is around £42,000. Therefore the income received from the business after this amount will be the profit. An estimated monthly turnover would be: £3000 which would result in time period of about 14 months for the business to break even (assuming all income went towards breaking even). o) Cash Flow: Payments will be received whenever an item is purchased from the shop. Payment options will include cash, cheque or credit or debit card.
Variable costs: “Variable costs are costs that vary with the volume of activity”2 and they are: direct labor, Materials, Material spoilage & direct department expenses.
This chart shows the net revenues and net earnings for the years of 2013-2009. As you observe the net revenues have been consistent in the 18,000 for at least 3 years in a row. This is a good trend for the Kraft Food Group. The trend for the net earnings is sporadic. The net earnings is also called the bottom line. This shows the amount of money that is left over after paying all of the expenses. Kraft Food Group needs to cut down on its expenses.
To breakeven, we would have to sell 267,857 units. We plan on selling the Galaxy Note 8 at a price of $499 which is cheaper than our previous phones in the Galaxy Note line. Consumers aren’t going to purchase a new smartphone if the price is going to be in the same range of the Galaxy Note 7. So we are going to be selling the smartphone at a discount. We are using odd-even pricing for the Samsung Galaxy Note 8. It gives a sense to the consumer that they will be purchasing the Samsung Galaxy Note 8 at a bargain, instead of using the even pricing method. The cost to make the smartphone itself is around $275. There will be a picture below that will explain the details of the build of the smart phone. For the breakeven I subtracted the Total Cost from the Total Revenue. The profit for year 1 will be $1 billion dollars, I subtracted the total revenue for year 1, which was $1.06 billion and subtracted that number by the fixed cost amount of $60
The margin of safety assesses the cushion between budgeted sales and break-even sales. Furthermore, a break-even point identifies when an investment will generate a positive return. Therefore, it is where sales revenues minus variable and fixed costs generate zero profits (Kampf, Majerčák, & Švagr, 2016). The margin of safety calculates the sum by which actual sales can fall short of expectancies before a company will start undergoing deficits. In order to determine the margin of safety, break-even sales are deducted from budgeted sales and the variance is then divided by budgeted sales.
Cost can be divided into fixed and variable and by considering into fact that fixed and variable cost can be unarguably split into two, even though they behave differently based on the level of sales of volumes. Since, cost is used in every field to determine the price of an item and the unit sold. Two of the main components of cost are fixed and variable cost and is used to differentiate between the costs that have no direct correlation to business and those that do.
The break-even point is located in the intersection between the total expense line and the revenue line. As it is shows, Cosmo-cosmetics operates at a sales Volume to the right of the break-even point (point A), this means that it would earn a profit because the revenue line lies above the expense line over this range ?Profit area?
Every company has some kind of Revenue and they all have costs that are associated with running the company. It is also true that if a company wants to increase their Revenue, their costs will increase too. It is every company’s goal to maximize revenue and either through Production or Services, and minimize cost. These things are easy to figure out, but actually identifying the production and figuring out how it will increase or decrease with change is very difficult.