Wednesday, May 28, 2008

Calculate Break Even Analysis

Break-Even Analysis shows the point at which all costs are covered by revenue.

Can be used to determine:
  1. What volume must be sold to cover all costs at a given sales price.
  2. What price must be set to cover all costs given an estimated demand for the product

Assume the following costs:

Fixed costs (FC): $ 1,000,000
Variable cost/unit (VC): $ 10.00

BE = FC / (P-VC)

Calculate the break-even unit volume at selling prices of $15.00 and $20.00 per unit.

At $15.00, BE = 1,000,000 / (15 – 10) = 200,000 units

At $20.00, BE = 1,000,000 / (20 – 10) =
100,000 units

Lower volume needed at higher price

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