Definitions
Break Even Analysis
A calculation of the sales volume (in units) required to just cover costs.
A lower sales volume would be unprofitable and a higher volume would be profitable.
Break-even analysis focuses on the relationship between fixed cost, variable cost
(or cost per unit), and selling price (or selling price per unit).
Fixed Costs
Cost that do not change when production or sales levels do change, such as rent,
property tax, insurance, or interest expense. The fixed costs are summarized
for a specific time period (generally one month).
Variable Cost (Per Unit Cost)
Variable costs are costs directly related to production units. Typical variable
costs include direct labor and direct materials. The variable cost times the number
of units sold will equal the Total Variable Cost. Total Variable costs plus Fixed
costs make up the total cost of production.
Selling Price (per unit price)
The price that a unit is sold for. Sales Tax is not included the selling price and
sales taxes paid is not included as a cost. The Selling Price times the number
of units sold equals the Total Sales.
Break Even Point
The sales volume (express as units sold) at which the company breaks even.
Profits are $0 at the break even point. The break even point is calculated
by the following formula: Break Even Point = Fixed Costs / (selling price-variable
costs).
Time Period
-
The fixed costs are summarized for a specific time period.
- The per unit variable cost is not
dependant on a specific period of time.
- The per unit selling price is not
dependant on a specific period of time.
- The Break Even Point is expressed a the number of units, over a specific time period,
that must be sold to obtain a Net Profit of $0. The time period the units
must be sold is always the same as the time period of the fixed costs.
Typically the time period is Monthly, however it could be Yearly or even Hourly.
For example, a farmer seeking the break even on an annual corn crop would choose
a yearly time period. The farmer would add up the fixed costs for the whole year
and the break even sales volume would be expressed as a yearly sales volume.
The text that is written in the time period field is copied to the title of the
Break Even Graph and Break Even Report. If you leave the field blank then
nothing will be copied.
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