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# Break Even Basics Basics

Total Revenue

Total Costs

## Total Revenue (TR) (TR)

Thisisthetotalamountofmoneyafirmreceivesfrom sellinggoodsorservices Itiscalculatedusingthefollowingformula: Total Revenue (TR)

## Total Costs (TC) (TC)

Thisisthetotalamountofmoneyafirmspendson makinggoodsorservices Itiscalculatedusingthefollowingformula: Total Cost (TC)

Where:

## An Example of Total Costs Costs

Afirmmakes10,000cansofdrink Ithasthefollowingfixedcosts:
1,000rent 5,000Electricity.

## Theyalsoknowthatitcosts5ptomakeeverycanof drinkthatitproduces. Totalcostwillbe:

FC(1000+5,000)=6,000 VC(10,000x5p)=500 TC=6,000+500=6,500

## Calculating The Break Even Point Point

Onceafirmknowsits totalrevenueandtotal costsitcancalculate itsbreakevenpoint Thisoccurswhere TR=TC,i.e.whenthe 2figuresarethesame Usethefollowing informationtocomplete thetable:
FC=2000 VC=2perunit Sellingprice=4
Output 0 200 400 600 800 1000 1200 1400 1600 1800 2000 FC VC TC TR Profit

## The Break Even Chart Chart

Itiseasiertoseethisinformationgraphically Thiscanbedoneusingabreakevenchart
e.g.,usingthepreviousfigures:
CostsandRevenue() 8000 7000 6000 5000 4000 3000 2000 1000 200400600800100012001400160018002000 Output Breakevenpoint TC=TR TR

T FI RO

TC

ss o

MarginofSafety FC

Actual Sales

## Break Even Output

Soinourpreviousexample,themarginofsafetywould be:
ActualSales=1800units BreakEvenLevel=1000units MarginofSafety=18001000=800

## Using A Formula to calculate The Break-Even Point Point

Creatingagraphtocalculatebreakevenistime consuming Itisquickertousethefollowingformula:
Break EvenPoint FixedCosts
=

## (SellingPriceVariableCostPerUnit) 1,200 Break Even Point = 2015

Break = Even Point

ForExample:
FixedCosts VariableCosts SellingPrice 1,200 15 20

240