Formula and Execution
Per unit cost | The cost incurred on a single unit is called per unit cost. This cost is a combination of variable cost per unit and the fixed cost per unit. |
Margin | The ratio between profit and revenue is called the margin. |
Mark-up | The ratio between profit and cost is called mark-up. |
Per unit revenue | The selling price per unit is called per unit revenue. |
Fixed cost | The cost is fixed in nature and does not vary with the number of units produced. |
Break-even units | The number of units at which there is no profit and loss. |
Break-even sales | The amount of revenue required to reach no profit and loss situation. |
Break-Even Analysis Calculator
Business is an integral part of the prosperous and socialized societies. Modern-day businesses exist in three forms; one of them is the corporate form of business. The company's form of business is complex and involved many transactions. Large numbers of shareholders hold public limited companies. That's why these companies are not only interested in more profit but also keenly taking steps to increase shareholders' wealth. Corporations using different techniques to know when the company revenue will cover the cost and start making a profit. One such method is break-even analysis. Calculating break-even manually is time-consuming. Web developers are trying to develop tools to make this slow process more efficient and effective. One such tool is the break-even calculator.
Why is break-even calculator used ?
Calculating break-even manually is sluggish and dull. There are always chances of error in the manual calculation, so to get rid of such problems, we use the break-even calculator.
How can it help?
- This calculator is helpful in many ways like
- It consumes less time while calculating the break-even.
- There is no chance of error while calculating the break-even, subject to the condition that values are correctly inserted in their respective portions.
- It helps to calculate values efficiently and effectively.
- Break-even calculator calculates break-even sales in dollar amount, and in the number of units sold at the same time, there are no separate calculations for the two.
To whom it will help
Break-even calculator is helpful for two types of peoples:
- Students can take help from this calculator while doing their assignments on break-even analysis. It gives you the value of break-even sales and the number of units.
- It helps accountants while calculating the break-even sales and units of the company.
Steps involved in break-even calculator
Three steps are involved in calculating break-even sales or units in the break-even calculator. These steps are:
1. Per unit cost: Put the amount of per-unit cost in the calculator.
2. Per unit revenue: Insert the value of per-unit revenue in the calculator.
3. Fixed cost: Put the value of fixed cost in the fixed cost portion.
Once the values of these three terminologies are put in their respective portions, it gives you results in other parts like margin, break-even sales, etc.
Example: Company A is involved in the shoe industry. Per unit, the cost is $10 while selling price per unit is $50. Company A pays $30 as the rent of the office.
Solution:
Per unit cost = $10
Revenue per unit = $50
Fixed cost = $30
Put these values in breakeven calculator, it gives you the following values in each portion.
Note: If anyone among the three values is missing, other portions will show no result, as shown below.
The fixed cost value is a must to come up with results in break-even portions regarding units sold and revenue generated in dollar amount.
Formulas used in break-even calculator
There are five formulas used in break-even calculator:
1. Margin formula: This formula is used to calculate the margin generated as a result of the transaction. The formula of margin is (Profit/sales).
2. Mark-up formula: This formula is used to calculate mark-up on the product. The formula of the mark-up is (Profit/cost)
3. Contribution margin formula: When variable cost is deducted from the sales, this is called contribution margin. The formula of contribution margin is (sales – variable cost).
4. Break-even formula in terms of units: The point where the company is in no profit and loss is called the break-even point. At the break-even point, expenses and revenue are equal. The formula of break-even point is (Fixed cost/contribution margin).
5. Break-even formula in terms of revenue: When break-even units are multiplied with revenue per unit, this gives you break even in terms of revenue. The formula of Break-even in terms of revenue is (Break-even units* revenue per unit) or (fixed cost/contribution margin ratio)
Example: Company A is involved in the manufacturing business. Per unit cost of the product is $40, and per unit selling price is $90. The rent of the company is $30.
Solution:
Per unit cost = $40
Revenue per unit = $90
Fixed cost = $30
Gross Profit = Revenue – per unit cost
= 90 - 40 = $50
Gross Profit = $50
Margin = Gross profit / revenue
= 50 / 90 = 0.5555or 55.55%
Margin = 55.55%
Mark-up = Gross Profit / per unit cost
= 50 / 40 = 1.25 or 125%
Mark-up = 125%
Contribution margin = revenue – per unit cost
= 90- 40 = $50
Contribution margin = $50
Contribution margin ratio = contribution margin / sales
= 50 / 90 = 0.55 or 55%
Contribution margin ratio = 55%
Break-even point in units sold = fixed cost / contribution margin
= 30 / 50 = 0.6 units
Break even pint in units sols = 0.6 units
Breakeven point in dollars amount = (Revenue per unit * break-even units) or (fixed cost/contribution margin ratio)
= 90*0.6 = $54 OR (30 / 0.55 = $54)
Breakeven point in dollars amount = $54
Note: Breakeven point in dollars amount can be solved through both the formulas, as shown above.
If you solve it manually, it takes too much time. Put values of per-unit cost, per unit revenue, and fixed cost in the calculator, the calculator solve it automatically and consume less time. It gives you amounts of all the other portions, i.e., margin, mark-up, etc. as shown in the below picture.
FAQS
Why is break-even important?
The Break-even point gives insight into the cost structure of the business that how much units are supposed to be produced and then sold to cover the cost and generate some profit.
What is the purpose of break-even analysis?
The primary purpose of break-even analysis is to find how much units must be sold to start making a profit. Break-even analysis is a good indicator of cost minimization. Break-even analysis also tells us about the performance of the marketing department that how frequently they are generating sales to cover expenses.
Example: There are two companies, A and B. Per unit costs are $20 and $25, respectively. Per unit, revenue is $50 of both the companies. The fixed cost is $25 for both the companies.
Solution: Company A
Per unit cost = $20
Per unit revenue = $50
Fixed cost = $25
Gross profit = 50 – 20 = $30
Gross profit = $30
Contribution margin ratio = Gross profit / Sales
= 30 / 50 = 0.6
Contribution margin ratio = 0.6
Breakeven point in dollars = 25/ 0.6 = $42
Breakeven point = $42
Company B
Per unit cost = $25
Per unit revenue = $50
Fixed cost = $25
Gross profit = 50 – 25 = $25
Gross profit = $25
Contribution margin ratio = 25 / 50 = 0.5 or 50%
Contribution margin ratio = 50%
Breakeven point = 25 / 0.5 = $50
Breakeven point = $50
Description | Per unit cost | Fixed cost | Per unit revenue | Break even sales |
Company A | 20 | 25 | 50 | $42 |
Company B | 25 | 25 | 50 | $50 |
From the table above, you can see that with the increase in per-unit cost, the break-even sales also increase. Company B needs more sales to cover its expenses as compared to company A. In the case of cost minimization; Company A is more efficient and effective.
What are the advantages of break-even analysis?
- Break-even helps us to plan production, as it tells us how many units are to be the sale to cover the cost.
- It also tells us the relationship between fixed cost and variable cost.
- It also tells us about the efficiency of the production department.
What are the disadvantages of break-even analysis?
- In practice, Sell prices never remain constant; it changes continuously. In the case of break-even analysis, the sales price is considered constant; i.e., it will not change.
- Production and sales will never be the same due to uncertainty in the market. Break-even analysis assumes that production and sales will remain the same, i.e., whatever units are produce must be sold.
- Break-even analysis only applies to single products while most of the companies are producing different types of products.
What are the assumptions of break-even?
- The fixed cost remains the same at all levels of production.
- The sale price per unit is constant.
- All the costs are either variables in nature or fixed in nature.
What are the limitations of break-even analysis?
- Break-even assumes that fixed cost remains constant at all levels of units produced. In real fixed cost changes after a certain level of production.
- In practice, it is complicated to divide the costs among variable costs and fixed costs.
What are the examples of a fixed cost?
Office rent, staff salaries utility expenses, etc. all are examples of fixed cost.
What is the variable cost?
The cost, which varies with each unit of production, is called a variable cost.
Which costs are included in variable cost?
Raw material cost, labor cost, etc. are included in variable cost.
Is advertising a fixed cost?
Advertisement is included in a fixed category, but it is a discretionary cost and can change from time to time, depending upon the company's marketing policy.
What is a good contribution margin?
There is no such standard that tells us that what is useful contribution margin and what is the bad margin. The more the contribution margin ratio near to 100%, the better is contribution margin.
What contribution tells us?
When variable cost per unit is deducted from the sales price per unit, the resultant value we get is contribution margin. The contribution margin value tells us that how much earning is available to pay fixed expenses and generate some profit.
How to maximize contribution margin
Contribution margin can be maximized in two ways
1. Increase sales: Sales can only increase if we keep the selling price low. The low selling price will generate high sales, and as a result, contribution increases.
2. Low per-unit cost: If the production cost of the product is less, it helps to increase the contribution margin.
What is the difference between contribution margin and contribution margin ratio?
The contribution margin tells us the difference between the selling price and variable cost. The contribution margin ratio is the ratio between contribution margin and total sales of the company.
Example: The revenue per unit of company A is $6o while the cost per unit is $25. What is the contribution margin and contribution margin ratio of the company?
Solution:
Revenue per unit = $60
Cost per unit = $25
Contribution margin = revenue – cost
= 60 – 25 = $35
Contribution margin = $35
Contribution margin ratio = 35 / 60 = 0.58 or 58%
Contribution margin ratio = 58%
What is the difference between contribution margin and gross profit?
There is a considerable difference between the two terminologies
- The contribution margin is the result of the deduction of variable cost from sales. Only the variable cost is deducted from the sales.
- Gross profit is the deduction of variable cost and fixed cost from the sales.
Example: A company generate a sales of $90, the variable cost per unit is $15 and fixed cost is $25. Calculate contribution margin and gross profit
Solution:
Sales = $90
Variable cost = $15
Fixed cost = $25
Contribution margin = 90 – 15 = $75
Contribution margin = $75
Gross profit = 90 – 15 – 25 = $50
Gross profit = $50
Is contribution always higher then gross margin?
Contribution margin don’t account for fixed overhead cost that’s why contribution margin will always be higher than gross profit as shown in the above example.
How higher fixed cost effect break-even point?
Break-even and fixed is related directly, higher the fixed cost higher will be the break-even point, and vice versa.
Example: There are two companies A & B, per unit cost of both the companies are the same, i.e., $20, and revenue per unit is also the same, i.e., $70. The fixed cost of company A is $25, and company B is $30.
Solution:
Company A
Per unit revenue = $70
Per unit cost = $20
Fixed cost = $25
Breakeven point = 25 / 70-20 = 0.5 units
Breakeven of company A = 0.5
Company B
Per unit revenue = $70
Per unit cost = $20
Fixed cost = $30
Break even = 30 / 70-20 = 0.6 units
Breakeven of company B = 0.6 units
Description | Per unit revenue | Per unit cost | Fixed cost | Breakeven point in units |
Company A | 70 | 20 | 25 | 0.5 |
Company B | 70 | 20 | 30 | 0.6 |
From the above table, you can see that more the fixed cost more units are needed to be sold to reach the break-even point.
What is a good break-even point?
The less the break-even point in terms of dollars or units, the better it is. If the break-even point is less, it takes a low level of sales to reach no profit and loss situation.
Example: The break-even of company A is $60, and that of company B is $40, which company is good, and why?
Company B is performing well regarding break-even because lesser the break-even point, fewer sales will be needed to reach the break-even point. The more quickly company sales reach a break-even point, the better it is for the company because the company starts generating profit after the break-even point. The main reason behind low break-even is cost minimization and an increase in sales. If the company minimized its cost without compromising on the quality of the product, it would help the company to set a low selling price and thus increase sales.
What is the margin of safety?
The amount over and above break-even point is called the margin of safety. The margin of safety tells us about the strength of the business, whether the business is generating profit or incurring losses. The formula of the margin of safety is (Current output – break-even point)
Example: The current monthly sales of company A are $50,000, while Break-even sales are $45,000. The current sales of the company are $40,000, while Break-even sales are $45,000. Find the margin of safety and which company is performing well?
Solution:
Company A
Current sales = $50, 5000
Break even sales = $45, 000
Margin of safety = $50,000 – 45, 000= $5,000
Margin of safety of company A = $5,000
Company B
Current sales = $40,000
Break even sales = $45,000
Margin of safety = $40,000 – 45,000 = ($5,000)
Margin of safety of company B = ($5,000)
Description | Current sales | Break even sales | Margin of safety |
Company A | $50,000 | $45,000 | $5,000 |
Company B | $40,000 | $45,000 | ($5,000) |
From the table above, you can see that company A is generating a profit of $5,000, while company B is incurring a loss of ($5,000). The margin of safety is a good indicator of the performance of the company operations. If the operations of the company are effective and generate enough sales to make a profit, then the margin of safety will show high value.
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