Financial break even point: Difference between revisions
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Revision as of 22:09, 19 March 2023
| Financial break even point |
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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.
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.
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.
