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 are 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

Fixed costs are summarized for a specific time period. Per unit variable cost is not dependant on a specific period of time. Per unit selling price is not dependant on a specific period of time. The Break Even Point is expressed in 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 Insurance ($600 per year $600/12 months = $50) Total Monthly Fixed Costs Variable Cost: Materials Labor Total Variable Cost Selling Price:

$100 $50 $150

$3 $4 $7 $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 Less Cost of Goods Sold Net Sales Expenses Rent Insurance Total Expense Net Profit

($10 per unit times 50 units) ($7 per unit times 50 units)

$500 $350 $150

$100 $50 $150 $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').