Break even analysis
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- čas přidán 19. 04. 2019
- How to calculate the break-even point for your business? This break-even analysis video explains the break-even point in words, in graphs, and in formulas, and encourages you to take various actions in your business to improve profitability.
A common definition of the break-even point is the sales volume where neither profit nor loss is made. An alternative way of saying the same thing: the break-even point is the sales volume where Contribution Margin $ equals Fixed Cost $.
Let’s look at the break-even point on a graph. On the horizontal axis the number of units sold, on the vertical axis the total dollars. Contribution Margin $ go up for every unit sold. Contribution Margin is revenue minus variable cost, what you sell the product for minus what it costs you to make an incremental unit. Fixed costs don’t vary with the number of units sold. Typical examples of fixed cost are rent, depreciation, and research and development expenditures. The break-even point is right here, where the two lines intersect. Let’s put some numbers to the example. If fixed costs are two hundred thousand dollars, and Contribution Margin is $4 per unit, then the business needs to sell fifty thousand units to break even.
If the business sells fewer than fifty thousand units (the red area), then Contribution Margin is lower than fixed costs, and the business is loss making. If the business sells more than fifty thousand units (the green area), then Contribution Margin is higher than fixed costs, and the business makes a profit.
Let’s do the exact same break-even analysis, but in formulas. The break-even point is the sales volume where Contribution Margin $ equals Fixed Cost $. That’s the same as saying that the volume sold times the Contribution Margin per unit equals the Fixed Cost $. And that’s the same as saying that the volume sold to break-even is equal to the Fixed Cost $ divided by the Contribution Margin per unit. And that’s the same as saying that the volume sold to break-even is equal to the Fixed Cost $ divided by the selling price per unit minus the variable cost per unit.
Let’s fill in the numbers to illustrate. $200,000 of fixed costs. The business needs $200,000 in Contribution Margin to cover that $200,000 in fixed costs. At $4 Contribution Margin per unit ($10 selling price per unit minus $6 variable cost per unit), the volume sold needs to be 50,000 units.
That’s all very interesting, but what should a business owner do with this information? The first thing that comes to mind is to try to sell as many units as possible. Increase the volume sold. But that’s not the only choice the business owner has. He or she can also work on reducing the fixed costs, increasing the price per unit, or reducing the variable cost per unit. Work on all these variables at the same time, and the break-even point becomes dynamic instead of static!
Philip de Vroe (The Finance Storyteller) aims to make strategy, #finance and leadership enjoyable and easier to understand. Learn the business and #accounting vocabulary to join the conversation with your CEO at your company. Understand how financial statements work in order to make better investing decisions. Philip delivers #financetraining in various formats: CZcams videos, classroom sessions, webinars, and business simulations. Connect with me through Linked In!
Enjoyed this video? Then please subscribe to the channel, and watch my related video on Contribution Margin czcams.com/video/CN7dJSmnWAM/video.html
@Benny Hill Thanks for the kind words, and welcome to the channel!!!!
yet again, CZcams is a more reliable resource then an actual school maths teacher sometimes
Happy to help!
pretty much every time...
its so sad but true
Pretty much more helpful than what they teach you at school 😅
Thank you for the no bullshit straight to the point explanation, really appreciate your effort, this was very helpful
You're welcome! Happy to help.
The simplicity and articulation of complex theories explained is amazing
Thank you! That is a wonderful compliment.
fantastic explanation, short, to the point and well illustrated!
Glad you enjoyed it, Julian! Thanks for the kind words.
Thank you so much! This video is the best one for the concept I’ve ever seen.
Thank you for the kind words, Suyeon! Please subscribe to the channel, and share with friends and colleagues! 🙂
One of my favorite CZcams Finance channel. Recommended.
Looking forward to a video which explains Operation Leverage. Thanks.
Awesome, thank you! I will add Operating Leverage to my list of possible topics. Thank you!!!
Very very good, clear and easy to get! Thank you
You're welcome! :-)
Love your detailed explanations!
Great to hear that! Thank you.
Absolutely loved it!
Great to hear that! Please spread the word!!!
Thank You for your simple and great explanation. I did subscribe to your channel !
Awesome, thank you Zara! Please spread the word.
Well said! Absolutely useful video.
Nice to hear that, Gilbert. Please subscribe to the channel, and spread the word.
Thank you for the very clear explanation❤
You’re welcome 😊
THANK YOU!
very simple and great explanation thankyou so much ❤️
Glad it was helpful! :-) Thank you for watching and commenting.
Thank you, I have benefited a lot.
Great to hear that! Thank you for watching and commenting.
this by far one of the best explanation ever!
Wow, thanks! That's a very nice compliment.
@@TheFinanceStoryteller me and my friends have a 15-grade project on how to implement BEP using analytical mathematic, so really I'm not joking or just complementing saying that this is was the clearest and the best video we had , thank you sooo much
Very cool that you are making the comparison between videos! Thanks for your support. Wishing you lots of success in the project!
Thank you so much ❤
You're welcome 😊 Happy to help! Please spread the word.
helped alot with my homework man! thx
Nice to hear that, Jip! Groeten, Philip
Wonderful explanation
Thank you! :-)
thankyou so much sir it means a alot for me
Happy to help! Thank you for watching and commenting.
genio! me hiciste entender todo
De nada! ;-)
thank uuuuu
this helped me with ECON class :)
Great to hear that! Please subscribe to the channel, I hope you will find many more videos that are helpful for you.
Hey great video!
Just a quick one -
Increasing fixed costs can also increase the profits right
So when sales double and fixed costs remain the same the profits will also double
Run through the numbers, and you will find the answer. No use doing this in words only.
this is amazing
Thank you, Yosita! Happy to help.
Thanks
Thanks. Some college instructors make it seem so complicated. I’ve basically understood this since I was 5 years old, but the terminology they use is what confused me.
I have had the same experience.... Those tend to be people that have never solved real life problems, only textbook ones....
FYI This is the same as :Total Revenue = Total Cost
Great Video!!♥♥
Yes! Thank you!
Thanks!
De nada!
im having a test this afternoon, your vid helps
Wishing you lots of success!!! Hope the test goes well.
How did your test go??? Speaking of studying and tests: did you come across any topics in your studies that I haven't covered on my channel?
@@TheFinanceStoryteller luckily the paper included very few about the BEP. Since the test went so well, i can say that your vid really save me (and those parasites sat behind me during the test) this semester.
Love from Bangladesh 🇧🇩 ❤ sir
Thank you
You're welcome
I like that 😎 and thanks
Happy to hear that, Ahmed!!! 😎
Tnk u so much sir♥️
Most welcome
Hi Sir
Is the defination, methods, assumption, advantage and disadvantage of break even point analysis similar with break even chart?
A break even chart is a chart that shows the sales volume level at which total costs equal sales. Losses will be incurred below this point, and profits will be earned above this point. The chart plots revenue, fixed costs, and variable costs on the vertical axis, and volume on the horizontal axis. So a break even chart is a visual representation of a break even point analysis.
Wow, like wow! HAHHAHA ganun lang pala yun.
Good video but, where did you get the selling price per unit? Also where did the variable cost come from? because unless im mistaken 10 and 6 was not mentioned in the video previously
Excellent point. The $10 selling price and $6 variable cost per unit are things I came up with for illustration purposes. I use the same (or similar) numbers in my videos on FIFO and LIFO. I should have clarified that in video, my apologies.
HEYY is this for business mathematics ?? plz help me
@@babybear1576 I don't write my videos for any specific curriculum. Whoever wants to watch them, feel free to do so.
I like your videos, I can compete everyday against my colleagues who pretend to know better…;)
Hahaha, that's a great use of the information. 🙂 Wishing you all the best in outsmarting them.
@@TheFinanceStoryteller thanks…
nice video .... i am a finance major myself ... can you do a video on the income from your channel
Currently about $15 per day. I did a video about a year ago when I was at 2900 subscribers (now at nearly 15K subscribers): czcams.com/video/0Ca00Up-trs/video.html
Thank you so much for helping! Hopefully I will pass my entrance exam. Also, I had to ask are you Dutch? I could tell by your accent :)
Yes I am! 😎 Wishing you lots of success with your exam!!!
How do you tell if your business is going to be successful based off of the break even point?
I would ask myself: is it realistic and achievable to sell far more units than my break even point volume?
can this model be applied to service companies? Eg Ecommerce in purchasing good?
Yes, any situation where there is a distinction between fixed costs and variable costs.
I have a question please, what do you mean by per unit? Is the unit here mean product? Could you help me?
Correct. Per unit = per piece = per item.
@@TheFinanceStoryteller 😊Thank you
can we calculate all this on calculator ?
Hi Prashant! Yes, calculator or spreadsheet.
Dear Friends, Could you write the formula of EBITDA breakeven?. Thanks.
Hello! I am not going to give you a direct answer, but will help you get started. For the "regular" breakeven point, your starting point is: The sales volume where neither profit nor loss is made. The formula for that is Contribution Margin $ = Fixed Cost $. You then substitute CM$ for its elements. Volume sold * CM$ per unit = Fixed Cost $, and on and on as shown in the video.
For EBITDA breakeven, start with the formula EBITDA = 0. You then substitute EBITDA by Revenue minus certain types of expenses, or you substitute EBITDA by net income + depreciation + amortization + interest + taxes.
Hope this helps!
Hello friends,
I have 1 question:
1/ I do not fully understand the influence of the formulas for calculating bonuses for sales on the formula for calculating BEP (Break-even point), specifically as follows:
bonus formula for salesmen: 0.05 * revenue per order
bonus formula for sales team lead: 0.01 * revenue per sales team
bonus formula for sales area (ASM): 0.01 * revenue per sales Area
bonus formula for sales director: 0.01 * revenue per country
Could you help?. Thank you.
If you include those into variable costs, then your break even point will become higher, as variable costs (in the case of company that manufactures physical goods) now not only includes direct materials, labor, utilities, etc. but also the bonuses that go up every time additional units are sold.
@@TheFinanceStoryteller , yes, but you can talk the affect the additional variable cost. Example: If I sell 1000 products, reach sales of 200,000 USD, I get a bonus of 20,000 USD, then I will calculate the variable cost of the bonus as: 20 thousand divided by 1000 = 20 USD. So I'm going to add 20 USD as additional variable cost to the BEP formula, right?.
@@ntcuong01ct1 Let's be careful here. Is the bonus truly variable, as in: I sell 1 unit and get $20, sell 2 units get $40, sell 3 units get $60? If this is the case, then add $20 as additional variable cost. Or is there a "trigger point": if I sell 999 units I get nothing, but at 1000 units and above I get $20K. In that case, you should treat it as "step-wise fixed cost": fixed cost stay the same until a certain level, then jump up to another level and stay the same from thereon until the next trigger point.
@@TheFinanceStoryteller , Yes, this is case of "trigger point", but I want to ask the affect of how this cost with the BEP?. With the "trigger point", we can calculate against the BEP, right?.
@@ntcuong01ct1 I would suggest that you replicate the graph shown at czcams.com/video/r8BIz5I-aDc/video.html in the video. Keep the contribution margin as revenue minus variable cost (not taking the bonuses into account). Add the "trigger point" based bonuses to the fixed cost line, that will "jump" to a higher value upon reaching the trigger. Then look where the two lines intersect, and you have found your BEP.
What are the discontinuities of a break-even point equation?
Hi! Can you define "discontinuities"? Not sure what you are referring to. It could be related to "step-wise fixed cost", see the conversation I had with ytuong1 in the comment section about bonuses for sales people involving "trigger points".
the state of having intervals or gaps; lack of continuity. Calculus related.
OK, then my earlier comment was valid. Another example: let's say a company is currently in a building with a certain size. Rent is included in fixed cost. If they keep growing, they need more space and have to move to a new building, causing fixed cost to "jump up" (as the rent for the new building is higher than for the old one) and then remain at the new level. That is very hard to model in a break-even point equation.
is it possible po na gamitin ang break even analysis, if lets say in a restaurant, the labor cost or rather salary of a cook that produces dishes is fixed, like 150 a month, not hour based, so will eventually use that as a part of the variable, is it feasible?
Break even analysis is a simplified view on the much more complex real world. You classify costs as either variable or fixed, even though they might not be 100% fitting that definition. For labor cost, I would indeed make the assumption that you include them in variable cost. Take the monthly salary and divide by the number of hours worked.
succinct enough
Thank you, Oluwatosin! 🙂
The break even point is when profit = 1 that is your revenue is equal to your costs. true or false
I am not answering homework questions for you.
Didn't get rhe definition for contribution margin
Revenue minus variable cost: czcams.com/video/CN7dJSmnWAM/video.html
the contribution margin is the gross profit itself ??!
No, it's almost the same, but not fully. Contribution margin is revenue minus variable cost. Gross profit is revenue minus COGS.
I have paper tomorrow 🤦🏻♀️😭
Wishing you lots of success!
Dear Friends,
I want to confirm:
If a company has passed the break-even point, why should we do variable costs minimums and maximum fixed costs then the profits will increase more?. Thank you.
Hi there! I am not sure whether I fully understand your question, but let me try to answer as best as I can. It's great when a company passes the break-even point and turns profitable. In order to improve profitability, trying to reduce the variable costs per unit (through productivity or sourcing leverage) is worth pursuing, and the company should align its spending in "fixed costs" (fixed does not mean that it is unchangeable) to its strategic goals. What do you want to achieve in the long term? Once you have some clarity on that, align your spending (up or down) to that goal. Take a look at my video on Selling, General and Administrative expenses (a big part of the "fixed cost") for a discussion on how that works czcams.com/video/5S9xjBXx5v0/video.html Or more in general, study the ins and outs of the income statement to learn about the dynamics of improving profitability czcams.com/video/Hq-44PHgAiU/video.html Hope this helps!
Does anyone know if we should include advance payment for fixed asset? Let's say advance payment for rent is 25,000 for 5month but monthly is 5,000. Should I use the monthly or the advance?
Hi! Take a look at my video on prepaid expenses czcams.com/video/hUz39T8-V1I/video.html or more in general adjusting entries (accruals, prepaids, depreciation): czcams.com/video/57CST6_RtWk/video.html
@@TheFinanceStoryteller Thank you! I'll take a look at them
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