Financial break even point: Difference between revisions
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The '''financial break-even point''' is the point at which a company's revenues equal its expenses, resulting in a profit of zero. It is typically expressed in terms of units sold or dollars of revenue. A company can use the break-even point to determine how many units it needs to sell in order to cover its costs and start making a profit. This information can be used to make decisions about pricing, production, and other business strategies. | The '''financial break-even point''' is the point at which a [[company]]'s revenues equal its expenses, resulting in a [[profit]] of zero. It is typically expressed in terms of units sold or dollars of revenue. A company can use the break-even point to determine how many units it [[needs]] to sell in order to cover its costs and start making a profit. This [[information]] can be used to make decisions about pricing, [[production]], and other business strategies. | ||
==Financial break-even point formula== | ==Financial break-even point formula== | ||
The financial break-even point can be calculated using the following formula: | The financial break-even point can be calculated using the following formula: | ||
'''Break-even point (in units or dollars) = Fixed costs / (Price per unit - Variable cost per unit)''' | '''Break-even point (in units or dollars) = [[Fixed costs]] / ([[Price]] per unit - Variable [[cost]] per unit)''' | ||
* Fixed costs are expenses that do not change with the level of production, such as rent, salaries, and [[insurance]]. | |||
* Fixed costs are expenses that do not change with the level of production, such as rent, salaries, and insurance. | * Price per unit is the [[selling price]] of each [[product]] or [[service]]. | ||
* Price per unit is the selling price of each product or service. | * Variable [[cost per unit]] is the cost of producing each product or service, including materials, labor, and other direct costs. | ||
* Variable cost per unit is the cost of producing each product or service, including materials, labor, and other direct costs. | |||
For example, if a company's fixed costs are $50,000, the price per unit is $100, and the variable cost per unit is $70, the break-even point would be: | For example, if a company's fixed costs are $50,000, the price per unit is $100, and the variable cost per unit is $70, the break-even point would be: | ||
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$50,000 / ($100 - $70) = $50,000 / $30 = 1,667 units | $50,000 / ($100 - $70) = $50,000 / $30 = 1,667 units | ||
This means that the company would need to sell 1,667 units in order to cover its costs and make a profit of zero. | This means that the company would [[need]] to sell 1,667 units in order to cover its costs and make a profit of zero. | ||
Alternatively, you can express the break-even point in terms of revenue by multiplying the number of units with selling price. | Alternatively, you can express the break-even point in terms of revenue by multiplying the number of units with selling price. | ||
'''Break-even point (in revenue) = Fixed costs / (Contribution Margin)''' | '''Break-even point (in revenue) = Fixed costs / (Contribution Margin)''' | ||
* Where Contribution Margin is Price per unit - Variable cost per unit | |||
This can be useful in cases where you want to know the minimum amount of revenue a [[business needs]] to generate before it starts making a profit. | |||
{{infobox5|list1={{i5link|a=[[Marginal cost]]}} — {{i5link|a=[[Cost per unit]]}} — {{i5link|a=[[Fixed cost]]}} — {{i5link|a=[[Cost]]}} — {{i5link|a=[[Differential cost]]}} — {{i5link|a=[[Contribution margin ratio]]}} — {{i5link|a=[[Income budget]]}} — {{i5link|a=[[Average cost method]]}} — {{i5link|a=[[Contribution to sales ratio]]}} }} | |||
==References== | ==References== | ||
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* Tarzia, D. A. (2016). ''[https://arxiv.org/pdf/1611.03740 Properties of the financial break-even point in a simple investment project as a function of the discount rate]''. arXiv preprint arXiv:1611.03740. | * Tarzia, D. A. (2016). ''[https://arxiv.org/pdf/1611.03740 Properties of the financial break-even point in a simple investment project as a function of the discount rate]''. arXiv preprint arXiv:1611.03740. | ||
* Saywell Jr, R. M., Cordell, W. H., Nyhuis, A. W., Giles, B. K., Culler, S. D., Woods, J. R., ... & Rodman Jr, G. H. (1995). ''[https://onlinelibrary.wiley.com/doi/pdfdirect/10.1111/j.1553-2712.1995.tb03628.x The use of a break‐even analysis: financial analysis of a fast‐track program]''. Academic emergency medicine, 2(8), 739-745. | * Saywell Jr, R. M., Cordell, W. H., Nyhuis, A. W., Giles, B. K., Culler, S. D., Woods, J. R., ... & Rodman Jr, G. H. (1995). ''[https://onlinelibrary.wiley.com/doi/pdfdirect/10.1111/j.1553-2712.1995.tb03628.x The use of a break‐even analysis: financial analysis of a fast‐track program]''. Academic emergency medicine, 2(8), 739-745. | ||
[[Category:Financial management]] | [[Category:Financial management]] | ||
Latest revision as of 21:26, 17 November 2023
The financial break-even point is the point at which a company's revenues equal its expenses, resulting in a profit of zero. It is typically expressed in terms of units sold or dollars of revenue. A company can use the break-even point to determine how many units it needs to sell in order to cover its costs and start making a profit. This information can be used to make decisions about pricing, production, and other business strategies.
Financial break-even point formula
The financial break-even point can be calculated using the following formula:
Break-even point (in units or dollars) = Fixed costs / (Price per unit - Variable cost per unit)
- Fixed costs are expenses that do not change with the level of production, such as rent, salaries, and insurance.
- Price per unit is the selling price of each product or service.
- Variable cost per unit is the cost of producing each product or service, including materials, labor, and other direct costs.
For example, if a company's fixed costs are $50,000, the price per unit is $100, and the variable cost per unit is $70, the break-even point would be:
$50,000 / ($100 - $70) = $50,000 / $30 = 1,667 units
This means that the company would need to sell 1,667 units in order to cover its costs and make a profit of zero.
Alternatively, you can express the break-even point in terms of revenue by multiplying the number of units with selling price.
Break-even point (in revenue) = Fixed costs / (Contribution Margin)
- Where Contribution Margin is Price per unit - Variable cost per unit
This can be useful in cases where you want to know the minimum amount of revenue a business needs to generate before it starts making a profit.
| Financial break even point — recommended articles |
| Marginal cost — Cost per unit — Fixed cost — Cost — Differential cost — Contribution margin ratio — Income budget — Average cost method — Contribution to sales ratio |
References
- Kim, E. K., Shin, J. Y., Castañeda, A. M., Lee, S. J., Yoon, H. K., Kim, Y. C., & Moon, J. Y. (2017). Retrospective analysis of the financial break-even point for intrathecal morphine pump use in Korea. The Korean Journal of Pain, 30(4), 272-280.
- Tarzia, D. A. (2016). Properties of the financial break-even point in a simple investment project as a function of the discount rate. arXiv preprint arXiv:1611.03740.
- Saywell Jr, R. M., Cordell, W. H., Nyhuis, A. W., Giles, B. K., Culler, S. D., Woods, J. R., ... & Rodman Jr, G. H. (1995). The use of a break‐even analysis: financial analysis of a fast‐track program. Academic emergency medicine, 2(8), 739-745.
