To start with, the break-even point analysis represents a measurement system that determines the margin of safety. It does this by comparing the revenues or units that have to be sold to cover both fixed and variable costs linked with making the sales. Specifically, this ratio is a means of calculating the potential profitability of a project, by equating the total revenues with the total expenses.
As for the uses of the equations, there are several worth noting. Nonetheless, not all of them concentrate on the managerial accounting and cost management. In view of managerial accounting, it is critical to point out the distinction between revenues and profits. That’s simply because not all revenues are expected to bring the company profit. At the same time, some products are costlier than the revenues they could ever generate. In this situation, these products could trigger a loss, as opposed to generating profit.
Hence, the fundamental goal of the break-even point analysis formula is to establish the company’s profits after the variable and fixed costs are addressed.
The Formula of the Break-Even Point Analysis
Usually, the price per unit minus the variable cost per unit defines the contribution margin per unit. This is why another viable formula is the following;
This establishes the number of units that have to be sold so that the company would generate enough revenue for covering its expenses. So, how do you use this concept in actual sales dollars? In this view, you have to multiply the price of each unit by the answer from the first equation.
As we’ve already pointed, there are several ways in which you can utilize this concept. Production managers and executives must be aware of the sales levels, and whether they cover the fixed and variable costs round the clock. This is why the formulas might be changed every now and then to diminish the number of units needed for producing and increasing profitability.
For example, considering that the management made the decision to increase the sales prices of a given product by $50, this would inevitably have a dramatic impact on the number of units necessary for selling before accomplishing profitability. At the same time, the variable cost of every unit could be altered by making the production process more automated. At the same time, lower variable costs result in greater profits per unit, while diminishing the total number that must be produced. At the same time, the margin of safety mustn’t be overlooked.
To conclude, it is fundamental to take into consideration that these models mirror non-cash expenses such as depreciation. At the same time, utilizing a more advanced break-even analysis calculator could definitely be helpful for a more accurate calculation. We hope that you’ve found this article helpful!