As we know that a breakeven point is a point where there is no loss and no profit. This means a break even analysis provide us with the information that how many number of products must be sold to earn total amount that is exactly spent in making the products. In order to do break even analysis or to find a breakeven point we need some financial data that include fixed costs, variable cost per unit products produced and the average price of unit product. Formula of breakeven analysis is very simple that is
Breakeven Point = Fixed Costs / Average price per unit – variable cost per unit
Now the use breakeven analysis for making decisions can be understood by an example. Let us assume that we make toys with a fixed costs of $2000 per month and variable costs per toy is $2.5 where as the average price of toy is $5.99, now to make a profit you must reach the breakeven point that 537 number of toys per month.
Now as a manager you may have different questions that what if you increase the price of unit toy from $5.99 to $6.99. What if you don’t want to change the price of the toy but you are not earning the required profit. We can use breakeven analysis to answer these questions for example if the manger wants to earn $1000 profit the number of toys produced must be 824. As we know that the breakeven point is 537 toys and this means that each toy earns $3.49 above from its total cost as variable cost is subtracted from Average Price of toy to calculate the earnings per unit
5.99 -2.5 =3.49
Now by dividing the desired profit with the earnings per unit we can reach to the number of toys that must be produced
1000/ 3.49 = 287
Total numbers of toys that must be produced are
537 +287 = 824
That means you need to sell 824 toys to reach desired goal