How to do a Break Even Analysis

The break even is the point that tells a firm how much merchandise or services they need to sell so that they can cover their entire costs. A breakeven point is the point where there is no loss and no profit but the firm has recovered their total costs. In order to calculate breakeven point we need to have correct costs figures including fixed costs, variable costs, the sales price of the goods sold and the total revenue generated from the sales.

Basically the breakeven point depends upon the cost per unit volume and the sales price per unit volume of the goods. For example let’s take the following example where following assumptions are made:-

Variable Cost per Unit Volume = $ 248.07

Total Fixed Costs = $ 94,035

Revenue generated per unit sales = $325.00

Now in order to achieve a breakeven point where there is no loss and no profit we need to sell the goods according to the following parameters

Number of Units need to be sold per month = 1,222

Total Sales Revenue to be generated each month to achieve breakeven = $397, 262

Breakeven point is usually calculated on the bases of assumed values of fixed costs, variable cost. Sales price per unit and total sales revenue. However it must be done twice first by using assumed figures and then by using original figures. Breakeven analysis is often mistaken with the payback period that is the total period required to recover the investment. However one thing must be kept in mind that breakeven analysis and payback period are two completely different things.



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