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Break-even point

Break even point is the level of sales at which profit is zero and loss is
zero.
It is the quantity where the total revenue is just sufficient to cover the
total cost.

Break-even point
BEP is the point at which:
cost or expenses and revenue are equal (TC=TR)
there is no net loss or gain, and one has "broken even (L=0 & G=0)
selling price equals full cost of sale (P=CoS)

Contribution margin method


The contribution margin method is actually just a short cut conversion
of the equation method already described.
each unit sold provides a certain amount of contribution margin that
goes toward covering fixed cost.
Contribution margin method
To find out how many units must be sold to break even, we can use:
a. Unit Contribution Margin approach
B. Contribution Margin Ratio approach

- Unit Contribution Margin (C), or dollar contribution per unit, is


the selling price per unit (P) minus the variable cost per unit (AVC)
C=P-AVC

- Unit Contribution Marginthe marginal profit per unit sale is one of


the key building blocks of break-even analysis

BEP helps to provide a dynamic view of the relationships between sales,


costs and profits.

In the Cost-Volume-Profit Analysis model, total costs are linear in


volume.

If a company cannot sell certain amount of products, to make a profit


they could:
Try to reduce the fixed costs (by renegotiating rent for example, or
keeping better control of telephone bills or other costs)
Try to reduce variable costs (the price it pays for the tables by
finding a new supplier)
Increase the selling price of their tables.
Any of these would reduce the break even point. In other words,
the business would not need to sell so many tables to make sure it
could pay its fixed costs.
Assumption of Break Even Point
The Break-even Analysis depends on three key assumptions:
Average per-unit sales price (per-unit revenue)
Average per-unit cost
Monthly fixed costs

Average per-unit sales price (per-unit revenue)


This is the price received per unit of sales.
Average per-unit cost
This is the incremental cost, or variable cost, of each unit of sales
Monthly fixed costs
Technically, a break-even analysis defines fixed costs as costs that
would continue even if you went broke.
Regular running fixed costs, including payroll and normal expenses
(total monthly Operating Expenses) should be used instead.

Limitations
Break-even analysis is only a supply side (i.e. costs only) analysis, as it
tells you nothing about what sales are actually likely to be for the
product at these various prices.
It assumes that fixed costs (FC) are constant. Although, this is true in
the short run, an increase in the scale of production is likely to cause
fixed costs to rise.
It assumes average variable costs are constant per unit of output, at
least in the range of likely quantities of sales. (i.e. linearity)
Limitations
It assumes that the quantity of goods produced is equal to the quantity
of goods sold

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