Break even analysis including break even points for revenue and number of sales can be quickly determined using our Business Performance Analysis Modules.
What is Break-even Analysis
Break-even Analysis applies business revenue, variable and fixed expenses to determine the point at which revenue equals expenses. This point is the break-even point. At the break-even point business profit is 0. Revenue above the break-even point results in a profit. Revenue below the break-even point results in a loss. The break-even point can also be expressed in terms of the number of sales.
Benefits of Break-even Analysis
Knowing your break-even point provides a quick and clear reference point for business performance. Below it you are making a loss above it a profit. A break-even plot also clearly displays the profit/loss relationship to revenue and number of sales.
Extending break-even analysis we can gain further insight into the variable expense, fixed expense and profit relationship.
Looking at current data for the Example Business in the Business Performance Analysis Modules the Fixed Expense per unit is 17% of Revenue with the Number of Sales being 10 000 and an Average Sale Price of 100.
At the break-even point Fixed Expenses are 55% of Revenue with the Number of Sales being 3 090 and an Average Sale Price of 100.
This clearly demonstrates the reduction in per unit Fixed Expenses as the Number of Sales increases. The reduction in per unit Fixed Expenses with each additional sale results in a decreasing marginal cost for each sale made. Basically considering Fixed Expenses the next sale always provides more profit than the current sale due to the reduced Fixed Expense per unit.
However in most business operating environments each additional sale becomes a little harder (ie the easiest sales are made fist). So to complete the next sale it may require increased marketing effort or a reduced price. But as Fixed Expenses per unit decrease for each additional sale we actually have the amount of this expense reduction to either contribute to increased marketing or compensate for a price reduction without undermining our profit margin.
Performing Break-even Analysis
To calculate a businesses break-even point costs are identified as either Variable or Fixed expenses.
Variable Expenses
Variable expenses change with the volume of product or service provided. These costs include materials, production, distribution, and transaction costs. Variable expenses are incurred each time a product or service is produced or delivered. If the number of sales (product/service delivery) is 0 Variable expenses are 0.
Fixed Expenses
Fixed expenses remain constant (up to a point) while the number of sales vary. This includes administration, location, and finance costs. Fixed expenses are incurred even if the number of sales is 0.
Break-even Formula
Break-even Revenue Formula
Break-even Revenue can be calculated as:
Break-even Revenue = Total Fixed / ( 1 - (( Total Variable / Number of Sales ) / Average Sale Price ))
this is equivalent to
Break-even Revenue = Total Fixed / ( 1 - ( Variable Expense per Sale / Average Sale Price ))
Revenue less than break-even revenue results in a loss. Revenue greater than break-even revenue results in a profit.
Break-even Number of Sales Formula
The Break-even Number of Sales can be calculated as:
Break-even Number of Sales = Break-even Revenue / Average Sale Price
Less than the break-even number of sales results in a loss. Greater than break-even number of sales results in a profit.
You can easily perform Break-even analysis using our Business Performance Analysis modules.
