Pricing analysis: Minimize or eliminate the use of coupons or other price reductions offers, since such promotional strategies increase the breakeven point.
This monitoring certainly reduces the breakeven point whenever possible. Therefore, it’s the management responsibility to monitor the breakeven point constantly. In the case of a company whose breakeven point is near to the maximum sales level, this signifies that it is nearly impractical for the business to earn a profit even under the best of circumstances. It helps to determine the amount of losses that could be sustained if there is a sales downturn.Īdditionally, break-even analysis is very useful for knowing the overall ability of a business to generate a profit.
It helps to determine the change in profits if the price of a product is altered.
It helps to determine the impact on profit on changing to automation from manual (a fixed cost replaces a variable cost). This will help to show the maximum profit on a particular product/service that can be generated. It helps to determine remaining/unused capacity of the company once the breakeven is reached. The costs could change considerably and breakeven analysis will help in setting the selling price.īreakeven analysis is useful for the following reasons: Changing the business model: If the company is about to the change the business model, like, switching from wholesale business to retail business, then a break-even analysis must be performed. Creating a new product: In the case of an existing business, the company should still peform a break-even analysis before launching a new product-particularly if such a product is going to add a significant expenditure. Not only it helps in deciding whether the idea of starting a new business is viable, but it will force the startup to be realistic about the costs, as well as provide a basis for the pricing strategy. Starting a new business: To start a new business, a break-even analysis is a must. In the calculation of the contribution margin, fixed costs are not considered. 40 represents the revenue collected to cover the fixed costs. 25 per product, the contribution margin of the product is Rs. For an example, if the price of a product is Rs.100, total variable costs are Rs. The excess between the selling price and total variable costs is known as contribution margin. (Break-even point in rupees) Contribution Marginīreak-even analysis also deals with the contribution margin of a product. We get Break-Even Sales at 5000 units x Rs. 200 = 5000 units Next, this number of units can be shown in rupees by multiplying the 5,000 units with the selling price of Rs. 200 which is the contribution per unit (Rs. 10,00,000 First we need to calculate the break-even point per unit, so we will divide the Rs.10,00,000 of fixed costs by the Rs. The basic formula for break-even analysis is derived by dividing the total fixed costs of production by the contribution per unit (price per unit less the variable costs). These costs include cost of raw material, packaging cost, fuel and other costs that are directly related to the production. Variable costs are costs that will increase or decrease in direct relation to the production volume. In case of no production also the costs must be incurred. 
These costs are fixed irrespective of the production. Fixed costs include (but are not limited to) interest, taxes, salaries, rent, depreciation costs, labour costs, energy costs etc. These overhead costs occur after the decision to start an economic activity is taken and these costs are directly related to the level of production, but not the quantity of production. Components of Break-Even Analysisįixed costs are also called overhead costs. 1,00,000 selling similar products, Happy Ltd will be able to break-even with the sale of lesser products as compared to Sad Ltd. For example, say Happy Ltd has fixed costs of Rs. Generally, a company with low fixed costs will have a low break-even point of sale. Break-even is a situation where an organisation is neither making money nor losing money, but all the costs have been covered.īreak-even analysis is useful in studying the relation between the variable cost, fixed cost and revenue.
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