Changing the business model: If the company is about to the change the business model, like, switching from wholesale business to retail business, then a break-even analysis must be performed.Creating a new product: In the case of an existing business, the company should still peform a break-even analysis before launching a new product-particularly if such a product is going to add a significant expenditure.Not only it helps in deciding whether the idea of starting a new business is viable, but it will force the startup to be realistic about the costs, as well as provide a basis for the pricing strategy. Starting a new business: To start a new business, a break-even analysis is a must.In the calculation of the contribution margin, fixed costs are not considered. 40 represents the revenue collected to cover the fixed costs. 25 per product, the contribution margin of the product is Rs. For an example, if the price of a product is Rs.100, total variable costs are Rs. The excess between the selling price and total variable costs is known as contribution margin. (Break-even point in rupees) Contribution Marginīreak-even analysis also deals with the contribution margin of a product. We get Break-Even Sales at 5000 units x Rs. 200 = 5000 units Next, this number of units can be shown in rupees by multiplying the 5,000 units with the selling price of Rs. 200 which is the contribution per unit (Rs. 10,00,000 First we need to calculate the break-even point per unit, so we will divide the Rs.10,00,000 of fixed costs by the Rs. The basic formula for break-even analysis is derived by dividing the total fixed costs of production by the contribution per unit (price per unit less the variable costs). These costs include cost of raw material, packaging cost, fuel and other costs that are directly related to the production. Variable costs are costs that will increase or decrease in direct relation to the production volume. In case of no production also the costs must be incurred. These costs are fixed irrespective of the production. Fixed costs include (but are not limited to) interest, taxes, salaries, rent, depreciation costs, labour costs, energy costs etc. These overhead costs occur after the decision to start an economic activity is taken and these costs are directly related to the level of production, but not the quantity of production. Components of Break-Even Analysisįixed costs are also called overhead costs. 1,00,000 selling similar products, Happy Ltd will be able to break-even with the sale of lesser products as compared to Sad Ltd. For example, say Happy Ltd has fixed costs of Rs. Generally, a company with low fixed costs will have a low break-even point of sale. In this case, the business would need to sell 101 T-shirts to break even.Break-even is a situation where an organisation is neither making money nor losing money, but all the costs have been covered.īreak-even analysis is useful in studying the relation between the variable cost, fixed cost and revenue. In such cases, the business would always need to sell an additional item in order to break even. Sometimes the result is a little more complex, as the BEP may not be a whole number (eg 100.12). So this business breaks even when it sells 100 T-shirts. Simple calculation of break-even quantityĭrawing a break-even graph can be time-consuming, but there is a simpler way to calculate the break-even quantity:
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