Break-even Analysis Example

Scenario

A company produces and sells a product for $20 per unit.The fixed costs(FC) are $5,000,and the variable cost(VC) per unit is $10.

Formulas:

1.Total Revenue(TR) = Price per unit * Quantity sold

\[TR = P * Q\]

2.Total Cost(TC) = Fixed Cost + (Variable Cost * Quantity sold)

\[TC = FC + (VC * Q)\]

3.Break-even Point (BEP) in units:

\[BEP = FC/(P-VC)\]

Calculating the Break-even Point

\[BEP = 5000/(20-10) =5000/10=500\] So,the company needs to sell 500 units to break even.

Break-even Table

Quantity (Q) Total Revenue (TR) Total Cost (TC) Profit/loss(TR-TC)
$0 $0 $5000 -$5000(Loss)
$200 $44000 $7000 -$3000(loss)
$400 $8000 $9000 -$1000(loss)
$4500 $10000 $10000 $0 (Break-even)
$600 $12000 $11000 $1000(profit)
$800 $16000 $13000 $3000(profit)

At 500 unit,TR=TC,meaning no profit,no loss(break-even point).Beyon 500 units,the company starts making a profit