Break Even Analysis

Break even analysis

Edwin owns a bakery and was able to sell 120 pieces of bread at 10 Rs each in the month of October. He pays his assistant Rs 500, for supplies Rs 100 and remaining money on rent for Rs 600. Here the variable cost is paying for his assistance and supplies. Fixed cost is rent.  He has zero profits here and was able to only meet fixed and variable costs and expenses. He had obtained the break even sales but not gained any profit.

The wages given to assistant and supplies are variable expenses. This expense can vary by giving less wages. But the rent given for the shop cannot vary as it is fixed cost.

Next month if he wants to gain 10 % profit then he has to think of giving less wages to his assistance and supplies. He should also think of increasing the cost of bread. By doing this he can gain profit for his business. Basically break even analysis is a way of calculating how much of bread has to be sold to cover all the fixed and variable cost. How much money does Edwin need to run his business well and gain profit? The breakeven point is met only when income equals all business cost.

Break even analysis is a tool used to identify when a business will be able to cover all its expenses and begin to make its profit. In this case Edwin has to think of making profit by increasing the cost of bread and paying less wages. This can be done by doing a small research on his own business and plan well for gaining profit. Breakeven point determine if the business will be profitable and is included in the business plan. An established business will use this tool as it considers whether to change the price of a product, expand, or take on new debt.

Contribution margin identifies how much of each sales dollar is available to cover other costs and provide a profit.

Break even analysis = fixed cost/ contribution margin per unit.