Price of the product or service
Posted: Mon Dec 23, 2024 10:10 am
1.
If ABC Shipfast increases its prices, assuming other variables remain unchanged, its break-even point would be lower. The opposite would be true if ABC Shipfast decreased the price of its product. Suppose ABC Shipfast raises its price from €200 to €225. ABC Shipfast would only need to sell 40 units, instead of 50 (or generate €9,000 instead of €10,000) to cover its costs.
2. Sales volume
If ABC Shipfast does not change its prices and costs do not change, the quantity of products it sells determines its break-even point. Every additional euro of sales above the €10,000 break-even point, or unit sales above €50, represents a profit for the company.
The opposite is true for below-breakeven sales. For example, if ABC Shipfast's sales increase to €11,000, or 55 units, it earns a total profit of €500.
3. Changes in fixed or variable costs
A decrease in variable costs would lower ABC canadian email address list Shipfast's break-even point, making it easier to achieve profitability. Higher costs would raise the break-even point, making it more difficult to achieve profitability.
If ABC Shipfast’s fixed costs were to fall from €5,000 to €4,500, it would only need to sell 45 units (or generate €9,000 in sales) to break even; if fixed costs were to rise to €5,500, it would need to sell 55 products (or generate €11,000 in sales) to break even.
Frequently asked questions about how to calculate the break-even point
How do I calculate the break-even point?
The break-even point can be calculated either in terms of total sales in euros or total sales of units of product required for the business to break even. The break-even point for unit sales of product is calculated by dividing the fixed costs of a product by the contribution margin, or the price per unit of the product minus its (variable) costs of production. The break-even point for volume sales is calculated by dividing the fixed costs of the business by its contribution margin ratio, which will be a fraction of the price of the product.
How is break-even point used in business decision making?
The break-even point tells entrepreneurs how much they need to sell to cover all their costs and reach profitability. It can help them decide whether to raise prices, cut costs, expand, or seek a loan or new investors.
What is an example of a break-even point?
Let’s take an online retailer of running shoes as an example. Suppose its monthly fixed costs are €2,500, its average selling price is €125 per product, and its variable costs (what it pays to get the trainers from a wholesaler) are €100 per pair. Its break-even point will be the division of its fixed costs (€2,500) by the margin per pair of trainers (€25), or 100. Therefore, the business must sell 100 pairs of trainers per month to cover all its costs and break even.
What happens when the break-even point is reached?
At the break-even point, a business operates with no profit or loss. Beyond this point, more sales mean it starts to make a profit. Below that, it operates at a loss.
What is break-even analysis?
Break-even analysis is a method for determining when a business will start to make a profit—that is, when sales will begin to exceed its expenses. Small businesses can use break-even analysis to set sales goals, decide on prices to charge, and look for ways to reduce expenses. Investors can use break-even analysis when considering a new business to evaluate how long it would take for that business to become profitable.
If ABC Shipfast increases its prices, assuming other variables remain unchanged, its break-even point would be lower. The opposite would be true if ABC Shipfast decreased the price of its product. Suppose ABC Shipfast raises its price from €200 to €225. ABC Shipfast would only need to sell 40 units, instead of 50 (or generate €9,000 instead of €10,000) to cover its costs.
2. Sales volume
If ABC Shipfast does not change its prices and costs do not change, the quantity of products it sells determines its break-even point. Every additional euro of sales above the €10,000 break-even point, or unit sales above €50, represents a profit for the company.
The opposite is true for below-breakeven sales. For example, if ABC Shipfast's sales increase to €11,000, or 55 units, it earns a total profit of €500.
3. Changes in fixed or variable costs
A decrease in variable costs would lower ABC canadian email address list Shipfast's break-even point, making it easier to achieve profitability. Higher costs would raise the break-even point, making it more difficult to achieve profitability.
If ABC Shipfast’s fixed costs were to fall from €5,000 to €4,500, it would only need to sell 45 units (or generate €9,000 in sales) to break even; if fixed costs were to rise to €5,500, it would need to sell 55 products (or generate €11,000 in sales) to break even.
Frequently asked questions about how to calculate the break-even point
How do I calculate the break-even point?
The break-even point can be calculated either in terms of total sales in euros or total sales of units of product required for the business to break even. The break-even point for unit sales of product is calculated by dividing the fixed costs of a product by the contribution margin, or the price per unit of the product minus its (variable) costs of production. The break-even point for volume sales is calculated by dividing the fixed costs of the business by its contribution margin ratio, which will be a fraction of the price of the product.
How is break-even point used in business decision making?
The break-even point tells entrepreneurs how much they need to sell to cover all their costs and reach profitability. It can help them decide whether to raise prices, cut costs, expand, or seek a loan or new investors.
What is an example of a break-even point?
Let’s take an online retailer of running shoes as an example. Suppose its monthly fixed costs are €2,500, its average selling price is €125 per product, and its variable costs (what it pays to get the trainers from a wholesaler) are €100 per pair. Its break-even point will be the division of its fixed costs (€2,500) by the margin per pair of trainers (€25), or 100. Therefore, the business must sell 100 pairs of trainers per month to cover all its costs and break even.
What happens when the break-even point is reached?
At the break-even point, a business operates with no profit or loss. Beyond this point, more sales mean it starts to make a profit. Below that, it operates at a loss.
What is break-even analysis?
Break-even analysis is a method for determining when a business will start to make a profit—that is, when sales will begin to exceed its expenses. Small businesses can use break-even analysis to set sales goals, decide on prices to charge, and look for ways to reduce expenses. Investors can use break-even analysis when considering a new business to evaluate how long it would take for that business to become profitable.