Excel version of the PDF break even analysis is available at the bottom of the page.
To break even means you haven’t made any money or lose any money. It is a calculation to examine your margins for setting your prices when comparing against your cost to produce. Analysing different price levels relating to various levels of demand, an entity uses break-even analysis to determine what level of sales are needed to cover total fixed costs. A demand-side analysis would give a seller greater insight regarding selling capabilities
Break-even analysis is useful in the determination of the level of production or in a targeted desired sales mix. The analysis is for the companies internal use as a metric and calculations are often not required to be disclosed to external sources such as investors, regulators or financial institutions.
Break-even analysis looks at the level of fixed costs relative to the profit earned by each additional unit produced and sold. In general, a company with lower fixed costs will have a lower break-even point of sale. For example, a company with £0 of fixed costs will automatically have broken even upon the sale of the first product assuming variable costs do not exceed sales revenue. However, the accumulation of variable costs will limit the leverage of the company as these expenses are incurred for each item sold.
The calculation of break-even analysis may be performed using two formulas. First, the total fixed costs are divided the unit contribution margin. In the example above, assume total company fixed costs are £20,000. With a contribution margin of £40, the break-even point is 500 units (£20,000 divided by £40). Upon the sale of 500 units, all fixed costs will be paid for, and the company will report a net profit or loss of £0.
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