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.
Break Even Calculator Example
Assume the following:
Fixed Costs:
Monthly Rent
$100
Insurance ($600 per year $600/12 months = $50)
$50
Total Monthly Fixed Costs
$150
Variable Cost:
Materials
$3
Labor
$4
Total Variable Cost
$7
Selling Price:
$10
Break Even Point Calculation
Break Even Point =
Fixed Costs / (selling price - variable costs)
Break Even Point =
$150 / ($10-$7)
Break Even Point =
$150 / $3
Break Even Point =
50
To break even the company must sell 50 units per month.
If the Company just broke even, then its Profit and Loss Statement would look
like the following:
Monthly Profit and Loss Statement
Sales
Gross Sales
($10 per unit times 50 units)
$500
Less Cost of Goods Sold
($7 per unit times 50 units)
$350
Net Sales
$150
Expenses
Rent
$100
Insurance
$50
Total Expense
$150
Net Profit
$0
Break Even Analysis Calculation
After you click on the 'Calculate', the break even calculation is
performed. If the calculation is successful, the four following four
links will appear:
View the Break Even Analysis Graph
View the Break Even Analysis Report
Break Even Analysis Graph Options
Break Even Analysis Report Options
If the break even calculator was unsuccessful, then an error message
indicating why the calculation was not performed will be displayed.
Break Even Analysis Graph Options
To access the Break Even Graph Options click on 'Graph Options' (which is only
visible after clicking on 'Calculate').
The Fixed Costs Line
- You can choose to either include or not include the fixed cost line. This has
no effect on the total costs or break even point.
The Location of Line Titles - The graph has a key which
associates a line color with each line. The key includes the following Total
Revenue, Total Costs and possibly Fixed Costs. You should move the key to a
position where there are no lines.
Downloading and viewing the Break Even Analysis Graph
To view the graph click on 'View the Break Even Graph' (visible after clicking
on 'Calculate').
To download the graph:
Click on 'View the Break Even Graph' (visible after clicking on 'Calculate').
Right click on the graph.
Select Save Picture as...
A save picture dialog will appear.
Save the graph to a location where you can easily find it (i.e. your desktop).
The 'Save as type' should be jpeg (*.jpg).
Note: The calculator generates a 'picture' of the graph.
Break Even Analysis Report Options
To access the Break Even Report Options click on 'Report Options' (visible after
clicking on 'Calculate').
File Types
HTML
(Hyperlink Text Markup Language) - For viewing online. Opens an html
formatted internet page.
Word Document
- For downloading the file or for viewing online if you have a software program
on your PC that will allow you to do so. The file does not contain macros.
Excel Spreadsheet - For downloading the file or for viewing
online if you have a software program on your PC that will allow you to do
so. The file does not contain macros.
Decimal Digits
The number of digits that follows the decimal point (i.e. the cents). To include
the cents use 2, otherwise use 0.
Grid Lines
The lines between the cells of the table and a double solid line that surround
the table. The options are: None, Horizontal, Vertical or Both.
Alternate Row Colors
To alternate the colors of the rows. Generally alternating the row colors makes
it easier to read across long rows.
Format
Controls the color of the title and the color of the tables boarders.
Downloading and viewing the Break Even Analysis Report
To view the report click on 'View Break Even Report' (visible after clicking on
'Calculate').
If you are going to insert more than one report into a document (i.e. your
business plan) make sure you select the same formatting options for each
report.
