Break Even for Suraya
sealor
break_even.docxI am showing below the proof of breakeven, which is fixed costs/ contribution margin.
We start with the definition of breakeven and proceed using elementary algebra to derive the formula. Breakeven is a number and is created by knowing fixed and variable costs, and the retail sales price. It is thus not a point of discussion but is based on the assumptions of these variables.
Proof of Breakeven
Definition of Breakeven Volume: Total Revenue = Total Expenses
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Definition |
1. Total Revenue = Total Expenses |
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Breakdown of Definition |
2. Retail Price * Volume = Fixed Expenses + Variable Expenses |
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Further Analysis |
3. Retail Price * Volume = Fixed Expenses + (Volume * Unit Variable Expenses) |
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Subtract (Volume * Unit Variable Expenses) from both sides |
4. Fixed Expenses = (Retail Price * Volume) — (Volume * Unit Variable Expenses) |
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Factor |
5. Fixed Expenses = Volume * (Retail Price – Unit Variable Expenses) |
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Divide both sides by (Retail Price – Unit Variable Expenses) |
6. Volume = Fixed Expenses (Retail Price – Unit Variable Expenses) |
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Substitution based on Definition |
7. Since (Retail Price — Unit Variable Expenses) is called Contribution Margin, Therefore: Breakeven Volume = Fixed Expenses / Contribution Margin
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