- Google Image Result for http://images.vertex42.com/ExcelTemplates/break-even-point.gif. 2012. Google Image Result for http://images.vertex42.com/ExcelTemplates/break-even-point.gif. [ONLINE] Available at: http://www.google.com.au/imgres?imgurl=http://images.vertex42.com/ExcelTemplates/break-even-point.gif&imgrefurl=http://www.vertex42.com/ExcelTemplates/breakeven-analysis.html&usg=__N0grfat_uk-79f_S3QPcM3WehCo=&h=392&w=546&sz=9&hl=en&start=10&zoom=1&tbnid=BWOuXpjITkt8vM:&tbnh=95&tbnw=133&ei=OX9JUIWxI6yTiQfthYHgDA&prev=/search%3Fq%3Dbreak%2Beven%2Bpoint%26um%3D1%26hl%3Den%26safe%3Dactive%26sa%3DN%26biw%3D1680%26bih%3D900%26ie%3DUTF-8%26tbm%3Disch&um=1&itbs=1. [Accessed 07 September 2012].
- Breakeven Analysis – Charts – YouTube. 2012. Breakeven Analysis – Charts – YouTube. [ONLINE] Available at: http://www.youtube.com/watch?v=TLOo2mY6FIw. [Accessed 07 September 2012].
- Google Image Result for http://www.12manage.com/images/picture_break_even_chart.gif. 2012. Google Image Result for http://www.12manage.com/images/picture_break_even_chart.gif. [ONLINE] Available at: http://www.google.com.au/imgres?imgurl=http://www.12manage.com/images/picture_break_even_chart.gif&imgrefurl=http://www.12manage.com/methods_break-even_point.html&usg=__6kPDVOZs4k0nsguv-DrL1h27x3I=&h=302&w=447&sz=5&hl=en&start=1&zoom=1&tbnid=C9uqSz04aXL02M:&tbnh=86&tbnw=127&ei=OX9JUIWxI6yTiQfthYHgDA&prev=/search%3Fq%3Dbreak%2Beven%2Bpoint%26um%3D1%26hl%3Den%26safe%3Dactive%26sa%3DN%26biw%3D1680%26bih%3D900%26ie%3DUTF-8%26tbm%3Disch&um=1&itbs=1. [Accessed 07 September 2012].
Part 2 – Equations
Now, that I have introduced the basics of Cost Volume Profit Analysis, at Part 1. I’m going to introduce you to a new level the equation, the graphs, mainly what mathematician likes at an accounting topic. I’m going to introduced you to the meaning of each word in the equation first, so you wouldn’t be confuse of what am I saying in the formulas.
Elements of CVP
- Fixed Costs ; “FC”
- Variable Costs; “VC”
- Number of units sold; “X”
- Selling price per unit; “S”
- Expectation profit; “P”
- Break-even Units; “BU”
- Total Revenue; “TR”
- Total Variable Cost; “TVC”
- Total Contribution Margin; “TCM”
- Contribution Margin Per UNIT; “CMP”
- Sale Unit; “SU”
- Expect Profit “EP”
- Variable cost per unit of contribution margin; “VCCM”
This are the words that would be in the equation that will solve the contribution Margin and Break-Even analysis of your Business.
I Introduced contribution margin first, because CM “contribution margin are included in break even analysis so you would understand where I get the contribution margin first than the break even analysis.
Contribution margin is the comparison of the profitability of different services or product your business or my business are offered
Formulas of Contribution margin
To find out your Total Contribution Margin.
The formula is: TR – TVC = TCM
Or in much detail Total Revenue
To find out your Contribution margin per unit.
The formula is: S * VC = CMP
Or in much detail Selling Price per unit subtracted to cost per unit resulting to contribution margin per unit.
- Break-even contribution margin must be equivalent to the fixed cost.
- Contribution must cover a business fixed cost or not your business would be making a big loss.
Break Even Analysis
A break-even analysis in point of view is where the net income would be zero. In my point of view break even point , it is like gravity no matter how high you will get you will come down, like break even it will always be zero.
Formulas of break even point
To find out your break- even point in units or “S”.
The formula is: FC / (“S” * “VC) = Break even point in units
Or in much detail Selling price multiply to variable cost then divide it to fixed Cost would you get your answer of getting the break Even point in units.
To find out your break- even point in numbers or “X”.
The formula is: S * BU
Or in much detail, Break-even units times by Selling price will get your results in Numbers or dollars.
To find out your sale (unit)
The formula is: ( FC + EP) / ( SP – VCCM) = SU
Or in much detail, fixed cost addition to expect profit , then divide it to the result of selling price per unit subtracting to variable cost per unit of contribution margin resulting to your sale unit.
Visual of break even point
This is a video of break even analysis in more in a visual understanding , that can help you to understand much more better, because this help me understand much better. My explanation are words, but visual effect would make it for you to understand much clearer.
Hints for Break even Point
You gotta lower your break even to gain faster profit, by this type of things increasing your selling price, reducing your fixed cost or variable cost. This ways can get your business running faster.
increase Break even, in my opinion increasing break even would not make your business much better, you wouldn’t get a lot of revenue and your income would not be successful than before.
Why is graph important at break even point, it shows where your business would be making. This are example of graph that can get your head much clearer on , the situation and what are the results for to be put on the graph and see where your business is progressing or not going good.
In smaller Numbers
In bigger numbers.
This is my overall explanation of cost volume profit analysis, I hope you can understand what I am saying.
I got to maintain the understanding of words that you would know about Cost Volume Profit or “CVP”, so I would be starting to introduce the keywords of the blog, and keep the flow going.
- Fixed Cost: That is held constant for a specified period of time.
- Sunk Cost: Money that has been spent and permanently lost.
- Margin: Difference between the market value of a collateral and amount of the loan advance against it.
- Variable Cost: A characteristic, number, or quantity that increases or decreases over time, or takes different values in different situations.
- Break Even Point: Point in time (or in number of unit sold) when forecasted revenue exactly equals the estimated total costs; where loss ends and profit begins to accumulate.
- Cost of Goods Sold: Alternative term for cost of sales.
- Operational Costs: Cost per unit of a product or service, or the annual cost incurred on a continuous process.
- Cost Control: the process or activity on controlling costs associated with an activity, process, or company.
- Revenue: The income generated from sale of goods or services, or any other use of capital or assets, associated with the main operations of an organization before any costs or expense are deducted.
- United: Definitive or determinate quantity adopted as a standard of measurement and exchange.
- Desired: Strongly wish for u want.
- Management Accounting: (Economics, Accounting and Finance/ Accounting and Book-keeping) another name for cost accounting.
- Cost: The amount that has to be paid or given up in order to get something.
- Expenses: Money Spent or cost Incurred in an organization’s efforts to generate revenue, representing the cost of doing business.
- Profit: The surplus remaining after total cost is deducted from total revenue, and the basis on which tax is computed and dividend is paid. It is the best known measure of success in an enterprise.
- Strategy: A method or plan chosen to bring about a desired future, such as achievement of a goal or solution to a problem.
Business Costs –
To get an idea of business costs, here are the deeper meanings of the 3 main costs and graphs
In my definition it’s a cost that will remains in a constant payment. An example of Fixed cost are, salary, purchase of equipment, rent, Insurance.
Fixed Cost Behavior
If you could see there are two different fixed costs; total fixed costs and Fixed cost per unit.
Total fixed costs is a line that would not change unless, there is a change like a rent, they bring up the rent prize because there’s new update or bring the rent down because its old and rusty.
Fixed Cost per Unit is a formula when you get your total fixed cost you divide that by units you sold therefore the line would never go up because its division.
Variable cost would be the cost that would not be expected on the business, the level of action would change. For an example of variable cost would be buying fuel, the fuel cost would go up depending on the situation of the search of fuel, so it’s not expected meaning it’s a variable cost.
So as Variable cost it has two different variable cost, a total and per unit.
Total Variable cost is Variable cost per unit multiplied by unit sold, and that’s how you get the variable cost
Variable cost per unit is the same as the equation of fixed cost per unit it is; Total Variable cost divided to units sold.
Mixed cost is simple its just a mixture of variable cost and fixed costs.
This is an example of mixed cost can you see its a mixed cost of fix cost which is green and variable cost which is blue.