The purpose of break-even analysis is to determine the point at which total cost equals total revenue. The green line plots the total revenue at all levels of output. Repeat this process for each subsequent level of output and plot it onto the figure.As you add another level of output (2 units total), the total revenue rises once again in the amount of the selling price, producing \(2(\$ 100)=\$ 200\).As you add one level of output, total revenue rises by the selling price of the product.The red line plots these total costs at all levels of output. As you add another level of output (2 units total), the total cost rises once again in the amount of the unit variable cost, producing \(\$ 400+2(\$ 60)=\$ 520\).As you add one level of output, the total cost rises in the amount of the unit variable cost.At zero output you incur the total fixed costs of $400.The graph shows dollar information on the \(y\)-axis and the level of output on the \(x\)-axis. Assume that a company has the following information: It is helpful to see the relationship of total cost and total revenue on a graph. This method requires unit information, including the unit selling price and unit variable cost. In this method, your goal is to determine the level of output that produces a net income equal to zero. Do you know how many units have to be sold to pay your bills? The answer to this question helps assess the feasibility of your business idea. Ultimately, all costs in a business need to be recovered through sales. Simply looking at the fixed costs, variable costs, potential revenues, contribution margins, and typical net income is not enough. If this is the case, are you still profitable? With so few unit sales in the industry and too many competitors, you might be lucky to sell 100 units. How does that volume of 400 units per month sound now? Unless you are revolutionizing your industry, it is unlikely you will receive a 40% market share in your first month of operations. What if you looked up your industry in Statistics Canada data and learned that the product in question sells just 1,000 units per month in total? Statistics Canada also indicates that there are eight existing companies selling these products. What's the big deal?” But let’s gather some more information. Now you may say to yourself, “400 units a month. Is that possible? Is it reasonable to forecast this many sales? You imagine you are going to sell 400 units. Should you start up the Internet business described in the last section? Right now, all you have are some projected costs and a forecasted level of sales. For this reason, break-even point is an important part of any business plan presented to a potential investor.įor existing businesses, this can be a useful tool not only in analyzing costs and evaluating profits they’ll earn at different sales volumes, but also to prove their potential turnaround after disaster scenarios.\) This is because some companies may take years before turning a profit, often losing money in the first few months or years before breaking even. Potential investors in a business not only want to know the return to expect on their investments, but also the point when they will realize this return. In other words, you've reached the level of production at which the costs of production equals the revenues for a product.įor any new business, this is an important calculation in your business plan. The break-even point is the point at which total cost and total revenue are equal, meaning there is no loss or gain for your small business.
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |