In economics, the break-even point is the point at which the cost of producing something is equal to the revenue from selling it. This means that the company is not making a profit or a loss, and is said to be “breaking even.” The break-even point is important because it helps a company determine how many units of a product it needs to sell in order to start making a profit. To calculate the break-even point, a company must consider its fixed costs, variable costs, and the selling price of the product.
To calculate the break-even point, a company must consider its fixed costs, variable costs, and the selling price of the product. Fixed costs are costs that do not change with the number of units produced, such as rent or salaries. Variable costs are costs that do change with the number of units produced, such as the cost of raw materials or labor.
Let’s review what’s Total fixed cost? (TFC)
Total fixed costs are all the costs that a company incurs that do not change with the number of units produced. These costs are also known as overhead costs, and they include expenses such as rent, salaries, insurance, and property taxes. Total fixed costs remain constant, regardless of how many units a company produces or sells. For example, if a company has total fixed costs of $10,000 per month, it will incur these costs even if it does not produce or sell any units during that month.
TFC are important because they represent a significant portion of a company’s expenses. In order to be profitable, a company must generate enough revenue to cover its total fixed costs, as well as its variable costs (which do change with the number of units produced) and any other expenses. The break-even point, which is the point at which the company’s revenue is equal to its costs, is determined by the relationship between the company’s total fixed costs and its variable costs.
What’s Total Variable Cost? (TVC)
Total variable costs are all the costs that a company incurs that change with the number of units produced. These costs are directly related to the production of the company’s goods or services, and they include expenses such as raw materials, labor, and utilities. Total variable costs vary with the number of units produced or sold, and they tend to increase as the company produces more units.
TVC are important too because they represent a significant portion of a company’s expenses. In order to be profitable, a company must generate enough revenue to cover its total variable costs, as well as its fixed costs (which do not change with the number of units produced) and any other expenses. The break-even point, which is the point at which the company’s revenue is equal to its costs, is determined by the relationship between the company’s total fixed costs and its total variable costs.
How to calculate a break even point?
To calculate the break-even point, first determine the total fixed costs and the total variable costs per unit of the product. Then, divide the total fixed costs by the difference between the selling price per unit and the total variable cost per unit. This will give you the number of units the company needs to sell in order to break even. For example, if a company has fixed costs of $10,000 and variable costs of $5 per unit, and the selling price per unit is $10, the break-even point would be calculated as follows:
Break-even point = $10,000 / ($10 - $5) = $10,000 / $5 = 2,000 units
Let’s see another real life example, a Toy company has total fixed costs of $20,000 per month including the factory rental and machine maintenance, and variable costs of $7 per unit for the direct marketing expense. The selling price per unit is $15. To calculate the break-even point, we use the following formula:
Break-even point = $20,000 / ($15 - $7) = $20,000 / $8 = 2,500 unitsThis means that the company needs to sell 2,500 units in order to break even and start making a profit.
It’s important to note that the break-even point is just a starting point for profitability. A company may need to sell more than the break-even point in order to make a significant profit, and it may need to adjust its prices or reduce its costs in order to become more profitable.
