Vous êtes sur la page 1sur 20

# Break Even Analysis

## Break Even Output

The level of output at which total sales revenue is equal to total costs of production When costs are greater than revenue the firm makes a loss When costs are less than revenue the firm will make a profit What happens when costs = revenue? The firm will just break even

Assumptions
Fixed costs must be paid regardless of level of output Variable costs increase with output but at a constant rate, so if 1 unit cost 5 then 10 units will cost 50 Every Unit of output produced is sold Selling price remains constant regardless of units sold

Break-even analysis
is a method for finding out the minimum level of sales necessary for a firm to just start to make a profit

## Calculating Break Even

3 Methods
Using a table showing revenue and costs over a range of output levels Using a formula Using a graph

Table
Units of output (000s) Sales Revenue Fixed Costs Variable Costs Total Costs Profit

(000s)

(000s)

(000s)

(000s)

(000s)

0 1

0 15

50 50

0 5

2
3 4 5

30
45 60 75

50
50 50 50

10
15 20 25

6
7 8 9

90
105 120 135

50
50 50 50

30
35 40 45

10
11 12

150
165 180

50
50 50

50
55 60

Formula
Contribution per unit = selling price direct cost per unit This shows the amount that each unit contributes towards fixed costs Break even = Fixed Costs () contribution per unit ()

Sales Revenue/Costs
200

Graph
Total Revenue

150 Break Even Point 100 Fixed Costs 50 Break even output 0 Total Costs

2000

4000

6000

8000

10000

12000

Units of output

Break-even analysis
is based on: costs prices production/sales levels.

Definitions
Break-even quantity (BEQ) The level of sales or output where costs equal revenue and the firm is therefore making neither a loss nor a profit. Break-even revenue (BER) The level of sales revenue being earned by the firm at the break-even level of output. Break-even point (BEP) The position where TC and TR lines cross.

## You need to be able to draw the lines

Total Revenue(TR) = Number of items sold x their price Total costs (TC) = FC + VC(x) At break-even TR = TC or P(x) = FC + VC(x) So BEQ = FC/(P - VC)

## Drawing a diagram from scratch

FIRST work out BEQ Step 1 Extract the data FC 480,000 per month. VC: 60 per unit Price: 120 per unit

## Step 2 Calculate the BEQ

The equation - BEQ = FC / (P - VC) 480,000 per month / (120 - 60 per unit) = 480,000/60 = 8,000 units per month

## Step 3 Fix the X Axis (capacity)

If you are given a maximum capacity, use that figure. If not, double the break-even quantity is a good guide figure, or 16,000 units in this case.

Revenue is usually the greatest figure. In this case the maximum revenue is 16,000 x 120 = 1.92 million (price per unit x maximum possible sales).

FC

## Step 7 Add the TC Line

FC

Remember
Add labels to the two axes and to give the chart a title