Understanding Break-Even Analysis: Key Concepts and Calculations
School
Toronto Metropolitan University**We aren't endorsed by this school
Course
MKT 100
Subject
Marketing
Date
Dec 12, 2024
Pages
5
Uploaded by ElderKnowledge5555
MKT100 - Metric 7 Break-Even AnalysisPrinciples of Marketing (Toronto Metropolitan University)Scan to open on StudocuStudocu is not sponsored or endorsed by any college or universityMKT100 - Metric 7 Break-Even AnalysisPrinciples of Marketing (Toronto Metropolitan University)Scan to open on StudocuStudocu is not sponsored or endorsed by any college or universityDownloaded by Ryan D'Costa (dcostar2005@gmail.com)lOMoARcPSD|50480592
MKT100 - Metric 7 Break-Even AnalysisI. Introduction●Break-even analysis is a financial tool used by businesses to determinethe point at which their revenue equals their total costs●This point is known as the break-even pointII. Components of Break-Even Analysis●Toconductabreak-evenanalysis,businessesneedtoknowthefollowing components:●Fixedcosts:costs that do not vary with production or salesvolume, such as rent, salaries, and insurance●Variable costs: costs that vary with production or sales volume,such as raw materials and production labor●Selling price: the price at which a product is sold●Sales volume: the number of units of a product that are soldIII. Calculating Break-Even Point●The break-even point can be calculated by dividing total fixed costs bythe contribution margin, which is the difference between the sellingprice and variable costs per unit●For example, if a business has fixed costs of $10,000, a selling price of$50 per unit, and variable costs of $30 per unit, the break-even pointwould be:●$10,000 / ($50 - $30) = 500 unitsIV. Importance of Break-Even Analysis●Break-even analysis is an important tool for businesses as it helps themdetermine the minimum sales volume needed to cover their costs andavoid losses●It can also be used to evaluate the profitability of different products orpricing strategiesDownloaded by Ryan D'Costa (dcostar2005@gmail.com)lOMoARcPSD|50480592
V. Limitations of Break-Even Analysis●Break-even analysis assumes that the selling price, fixed costs, andvariable costs remain constant, which may not always be the case●It also does not take into account the time value of money or theimpact of changes in market conditions on sales volume and pricingVI. Sensitivity Analysis●Sensitivity analysis involves examining the impact of changes in keyvariables on the break-even point●This can help businesses assess the risk of changes in pricing, costs, orsales volume on their profitabilityVIII. Example of Break-Even AnalysisLet's say a company produces and sells t-shirts. The fixed costs of producingthe t-shirts are $10,000 per month, which include rent, salaries, and insurance.The variable costs per t-shirt are $5 for materials and $2 for production labor.The t-shirts are sold for $20 each.To calculate the break-even point, we first need to determine the contributionmargin per unit:Contribution margin = Selling price - Variable costs per unitContribution margin = $20 - $5 - $2Contribution margin = $13Next, we can calculate the break-even point:Break-even point = Fixed costs / Contribution marginBreak-even point = $10,000 / $13Downloaded by Ryan D'Costa (dcostar2005@gmail.com)lOMoARcPSD|50480592
Break-even point = 769 unitsThis means that the company needs to sell 769 t-shirts per month to cover itsfixed costs and break even.If the company decides to lower the selling price to $18 per t-shirt, thecontribution margin per unit will decrease:Contribution margin = Selling price - Variable costs per unitContribution margin = $18 - $5 - $2Contribution margin = $11We can then recalculate the break-even point:Break-even point = Fixed costs / Contribution marginBreak-even point = $10,000 / $11Break-even point = 909 unitsThis means that the company now needs to sell 909 t-shirts per month tocover its fixed costs and break even at the lower selling price.Sensitivityanalysiscanbeconductedbychangingthevariablesandcalculating the break-even point under different scenarios. For example, if thecompany increases its fixed costs to $12,000 per month, the break-even pointwill increase:Break-even point = Fixed costs / Contribution marginBreak-even point = $12,000 / $13Break-even point = 923 unitsDownloaded by Ryan D'Costa (dcostar2005@gmail.com)lOMoARcPSD|50480592
This means that the company now needs to sell 923 t-shirts per month tocover its increased fixed costs and break even at the original selling price andvariable costs.Downloaded by Ryan D'Costa (dcostar2005@gmail.com)lOMoARcPSD|50480592