🔴 2 Easy Steps: Break Even Analysis for Cost Volume Profit Analysis Tutorial


Break Even Analysis in 2 Easy Steps: Cost
Volume Profit Analysis Break Even Analysis Tutorial Alright. Welcome back again to MBAbullshit.com.
The topic for this video is “Cost Volume Profit Analysis” or CVP. It is also sometimes
referred to as “Break Even Analysis” or BEP for Break Even Point. Alright, let’s
get down to it. Remember you can always go back to MBAbullshit.com.
So now, let’s try first to look for the breakeven point for business which is selling
only one type of product. So we first have to do what we call “Break Even Point Analysis.”
This is a part or maybe even the first major fundamental part of “Cost Volume Profit
Analysis.” So for example, your business sells watches at ten dollars each and it costs
you three dollars in variable costs to make each watch. Now when you say variable cost,
that might mean the plastic and the metal which goes into each watch that you make.
Okay? That’s just an example. It cost you one hundred dollars per month
in fixed costs to run your watch business. So when we say fixed costs, an example might
be the rent. You have a flat fee of rent and maybe salaries of one hundred dollars per
month for the storekeeper and the rent. And it doesn’t change even when you sell more
watches or even when you sell less watches. It’s always the same. Unlike with the plastic
and metal as your variable cost, if you sell more watches then you also have to pay for
more plastic and metal to make more watches. If you sell less watches, then you have to
pay for less plastic and metal to make the watches. So that’s why it’s called variable,
meaning it changes a lot. So now, if you sell twelve watches in one
month, how much will your business earn or how much will your business lose? So to do
that, we use this formula. First, we look for the gross margin per watch, you’re selling
it at ten dollars per watch and it costs you a variable cost of three dollars to make each
watch. So you make a gross margin of seven dollars per watch. Now notice that this gross
margin is not yet your final profit. Why is it not yet your final profit? Because you
still have to pay for your fixed cost such as rent and stuff like that.
So seven dollars per watch, okay? You’re earning a gross margin of seven dollars per
watch or a margin of seven dollars per watch multiplied by twelve watches sold and you
have a total gross margin for the month or gross profit. Some people called it “Gross
Profit” but I find it confusing because it might be confused with “File Profit”,
so it’s better to use the word margin. So you have the total of gross margin for the
month of eighty four dollars. Again, this is not yet your final profit, you have to
subtract the fixed cost. So, less the fixed cost of one hundred dollars per month, as
you remember from the last slide, and you make a loss of sixteen dollars. Eighty four
dollars minus one hundred dollars equals negative sixteen dollars. It’s negative so that means
you lose money. So the important question is: How many watches
do you need to sell so that you will not lose any money? So that you will at least break
even. So break even means if you’re selling enough so that you don’t lose any money.
So at breakeven you are not yet earning any money but you’re already not losing any
money anymore. So how many watches do you need to sell?
So for that, you need to use this formula. It looks like this. The breakeven point in
number of units equals your fixed costs divided by your selling price minus your variable
costs. So it looks like this. As you remember, the fixed cost is one hundred dollars a month
and you divide that by your selling price of ten dollars and then you subtract the three
dollars in variable costs. And you’ll come up with a number of one hundred dollars divided
by seven dollars; because this now is seven dollars. And you’ll come up with the number
of fourteen point twenty nine. So you need to sell fourteen point twenty nine units or
fourteen point twenty nine watches in order to break even so that you do not lose any
money. However, remember that you cannot sell part
of the watch. You can sell fourteen watches but that’s not enough. So you need to sell
an additional point twenty nine watches. But obviously you cannot sell point twenty nine
watches. You sell one watch or two watches or three watches. So therefore, you must round
it off to the higher number of fifteen units. Okay? So in regular math, you usually round
off the amount to the nearer whole number. So in this case, you might round it off to
fourteen because it’s nearer to this than fifteen.
However, in this case if you round it off to the lower number fourteen, you will still
lose money. So, you always round it off to the higher number, fifteen units. Okay? So
that is your breakeven point in number of units or in number of watches. You need to
sell fifteen watches in order to break even. In this case, you would probably earn a small
profit. debbierojonan Page 1

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Comments

  1. Where did you get the (-16) loss per month? You stated fixed cost was $100 (which would be $100/12=$8.33 for the month, wouldn't it?) :o/

  2. Thank you, I'm doing my final project for a business class and never had this figured out. Following the video helped me get it, great job.

  3. People fail, when this simple illustration made much much complex and given as a topic in the text book.

    Each and Everything can be/ should be explained as simple as the style adopted in this Video. This will not just help to pass the course, but also will be with us forever, helping throughout the life and also will give room for innovations.

    Thanks for the presentation. Keep up the good job.

  4. hi..do u have any tutorials vdo on how prepare pro forma profit and loss a/c and balance sheet by percent sales method

  5. it's such a shame when my professor doesn't know how to teach students.
    He's smart and graduated from University of Texas. But his teaching ability is worse than 15 years old kid! (seriously!) That's why students like me have to find someone who is capable of teaching the material and luckily I found you. 🙂

  6. Thank you so much for this my man!!!  My accounting teacher is the most stereotypical accountant.  He is the worst teacher and cannot put these concepts in layman's terms.  What I thought was impossible, is now simple!  Yay to finals week!!!

  7. Amazing! Text book/lecturers could not put this simple concept into simple terms if they tried.  Thank you so much! I feel confident on BEP 🙂

  8. 6:31 … ( But obviously, you CaHaha not sell point 29 watches ) 
    6:41 …. ( therefore you must run of to the Highhheerrrr number.. ) 

    Man you use all your damn energy to make us understand lol, i love your explanation 

  9. The sound quality is pretty bad, but your explanation helped me a bit better than my accounting professor and my textbook so thanks!

  10. Selling price per unit(x) -fixed cost=cost per unit(x)
    This is an another method when you figure out the x you will get the break even point with unit
    Using the answer of x times the selling price per unit you will get the break even points with volume

  11. The cost of all items sold by Guzmart office suppy during the month of june is 95,000.00. The overhead is 50,000.00. What is the breakeven point?

  12. hey bro just wanted to ask is gross margin per unit and contribution per unit not the same thing?. p.s. love your vids keep up the good work

  13. Thumbs up on this. I thought I would lose 15 minutes of my life learning this equation instead you taught it 7. Good work.

  14. If there are three alternatives to solve for, what do you do if two out of three of them give the same value (and they're the highest)? Does it mean that those two would be the best alternatives or do you pick one?

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