Exceltemplates.org – Break event is a condition when you can finally cover the cost of production and others by selling certain amount of products you have. Break Even Analysis then becomes important in this case, so that you will be able to determine the right price for your product and other selling points.
Break Even Analysis Definition
As said before, Break Even Analysis is essential when you are trying to determine how much the price you will sell your products with. Since it remains as a significant part of a business, you have to know exactly how to perform the analysis.
However, first of all, you have to know the general terms used to create Break Even Analysis. They are as follows:
- Fixed cost; which refers to the costs which commonly do not change. It means that every month, you will always find this kind of cost on your expenditure list within the unchanged/slightly changed value. The examples of fixed cost are administrative payroll, rent cost, salary, etc.
- Variable cost; or cost which is changeable based on the factors around it such as sales commissions, inventory, and shipping cost. For instance, if the sales volume is high then the sales commission will also be high and vice versa. It can vary in different period of time.
- Price; this is the price of your product. To determine it, you should take a look at several things; such as the competitors’ price, the customers’ interest on your products, etc.
How to Use Break Even Analysis Excel Template
After you got the data for three elements above, you can start making the Break Even Analysis. Enter each value of those three and you can calculate Break Even point. The formula is: fixed cost is divided by the result from average price subtracted by average cost.
For instance, if fixed cost is $500, average price is $35, and average cost is $25, then the BEP is 500/(35-25) or 50. This result means that you will need to sell at least 50 products with the price of $35 before covering the cost or reach the Break Even.
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