Break-Even Analysis

define break-even analysis

a financial tool used to determine the point at which total revenue equals total costs → no profit or losses

define break-even point

level of sales at which total revenue equals total costs → no profit or losses

fixed costs

tend to remain constant and are not changed by level of production especially in the short term

variable costs

costs that change depending on level of output or activity

semi-variable costs

mixture of fixed and variable (may be fixed for a set level of production or consumption, then becomes variable after this level is exceeded)

how to calculate break-even point

= fixed costs / contribution margin

how to calculate contribution margin

= sales revenue - variable costs

how to calculate break even point as a number of unit

fixed costs / contribution margin unit

contribution margin unit = sales price per unit - variable cost per unit

how to calculate as total sales dollars ratio

fixed costs / contribution margin ratio

contribution margin in percent = (sales revenue - variable costs) / total sale

requirements that must be met to yield valid results

• valid and reliable data on costs and revenues are available to pharmacy manager

• all costs are correctly classified as fixed or variable

• costs and revenues act in a linear manner over the relevant range of sales volume

• the BEA is applied to a restricted, relevant range of sales volume

  • the pharmacy’s product mix must not change over period covered by BEA

list procedures for conducting a break-even analysis

• determine fixed costs

• determine variable costs

• determine price at which product will sell

• calculate contribution margin

• calculate break even point

• determine expected profits or losses

limitations of break-even analysis

• price of raw materials change

• number of competitors change

• the market is volatile = less predictable