Notes on Break Even Point
Fixed Costs – Debt Service on equipment, facilities, etc., salaries, taxes, utilities, insurance or, in general, expenses that don’t change with increases or decreases in production. Variable Costs – direct labor per unit, raw materials per unit Selling Price – adjust based on market strategies, net profit expected, break even point in time Here is an example: Fixed costs (FC) = $10,000/ year Variable costs (VC) = $30/ unit Selling price (SP) = $40/unit
Definition of the break-even point (BE point): (1) the amount of sales at which the net profit is zero; or (2) the point where total cost equals total revenue.
FC * * Q VC SP Q
FC 10000 units 1000 ( / ) year The break-even point (BE point): Q SP 30 40 VC
Here, we know that we have to produce and sell 1000 units annually to cover our total costs (fixed costs and variable costs). We will have a profit after we produce and sell more than that amount. Break Even Point in Units – For example: in this case, BE point is 1000 units per year and sales forecast is: Year 1 – 750 units (behind 250 units) Year 2 – 1000 units (total 1750 units – still behind 250 units) Year 3 – 1250 units (total sales at the end of year 3 = 3000 units or 1000 units per year, thus here you break even) You would breakeven at the end of the 3rd year and would make money after you’ve sold 1000 units every year thereafter.