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## Examples of Breakeven Analysis

The breakeven point is defined as the number of units a business needs to sell so that the cost of producing the units is equal to the revenue earned by selling the same or in other words the net profit is zero. We should be aware of the fact that although we have defined it with a manufacturing company’s viewpoint it can be applicable to other cases too. Below we have discussed some examples of breakeven analysis to understand it better.

Let us first derive the formula for the breakeven point. If N is defined as the no. of units, VC as the variable cost per unit; FC as the total fixed cost and P as the unit selling price then for N to be the breakeven number of units,

**P*N = FC+VC*N,**

**N = FC / (P-VC)**

As seen from the graph above and also if we apply the formula if the variable cost of producing a pen, which is sold for $10 is $5 and the fixed cost associated with the process is $100 then at least 20 pens are needed to be sold for the business to breakeven. We would like to make the readers aware of the fact that the difference between the Price Per Unit and Variable Cost Per Unit is called the Contribution Margin. Now we will be applying breakeven analysis to a couple of scenarios.

### Top 2 Real Life Examples of Breakeven Analysis

Below are the examples of breakeven analysis.

#### Example #1 – Multiproduct Company

Let us take the case of a multiproduct company producing three different kinds of products named A, B and C and try to find the breakeven number of units. The following table gives a breakdown of the price, variable costs and expected number of units to be sold and let us assume the fixed cost to be $6,600.

In this case, we need to find the weighted average sale price which is derived as follows,

- Weighted average sale price = {(100*50%)+(50*30%)+(20*20%)}/(100%)
- =
**$69**

Similarly, weighted average sale price for the variable cost is calculated as follows,

- Weighted average sale price = {(50*50%)+(30*30%)+(10*20%)}/(100%)
- =
**$36**

So Breakeven number of units using the above formula is,

4.9 (1,067 ratings)

- Breakeven Units = $6,600 / ($69 – $36)
**= 200**

Accordingly, the breakeven numbers for Product A is 50% of 200 that is 100 and similarly for Product B and Product C will be 60 and 40 respectively.

Now let us delve into a real-life example and try to apply this concept.

#### Example #2 – General Motors

Let us try to find the number of units needed to be sold by General Motors’ automotive division to breakeven.

*Source: Company disclosures.MM stands for million.*

First, let us give you a brief idea of what these numbers from General Motors’s Annual Report (or 10K) signify. For the number of units, we have taken the worldwide vehicle sales.

For 2018 the number of vehicles sold worldwide is 8,384,000 units.

For the deriving price per unit, the ideal way would have been to calculate a weighted average price of each model of vehicles with different selling price (e.g. Chevy and Le Sabre and many more have different prices). Since that would require an extensive analysis we have just used sales revenue as a proxy and divided it by a total number of units to derive the price per unit. The gross sales for 2018 were $133,045MM which when divided by 8,384,000 gives a price per unit of $15,869.

For variable costs per unit, we divided the line item *“Automotive and other costs of sales”* with the number of units sold. The Automotive and other costs of sales or variable costs for 2018 was $120,656MM which when divided by 8,384,000 gives a variable cost per unit of $14,391.

Finally, we took the line item “*Automotive and other selling, general and administrative expense*”, as a proxy for the fixed cost related to the automotive division. For 2018 the Automotive and other selling, general and administrative expense or fixed costs was $9,650MM.

Now it is very easy to calculate the breakeven and using the formula defined at the beginning,

- Breakeven Units = 9,650*10^6 / (15,869 – 14,391)
- = 6,530,438 units.

An interesting thing to note is that although the number of units the company is currently producing is almost 1.3 times the number of units General Motors is currently selling, there has been a steady decline in the number of units sold worldwide. We can also see the number of units to be sold for General Motors to breakeven has increased in 2018, which may be due to the increase in variable cost per unit.

### Conclusion

Although Breakeven analysis is a very simple and useful technique that can be used as a rough measure to deduce the production/sales numbers a business has to make, it comes with quite a lot of assumptions that fail in complex scenarios.

- The constant price and fixed costs we have assumed in our analysis might not be true in a reality where even fixed costs or the price of the product changes at various production levels.
- We have also assumed that sale is the output without considering the losses which might happen due to damage or expiry.
- Even the variable costs, which include the cost of raw materials, change depending upon the amount we are ordering as there are discounts given by the supplier for bulk orders.
- Lastly, Breakeven points cannot be applied so easily for service industries.

Hence, Breakeven analysis should just be the initial tool to analyze a business and must be followed by more advanced methods depending upon the nature of business.

### Recommended Articles

This has been a guide to Breakeven Analysis Examples. Here we discuss the top 2 real-life examples of breakeven analysis with calculations to find the breakeven points. You can learn more about financial analysis from the following articles –

- Formula of Gross Sales
- Guide to Semi Variable Cost
- Everyday Examples of Classical Conditioning
- Real-Life Examples of Confirmation Bias
- Formula of Break-Even Point (BEP)
- Accounting Break Even Point Calculation
- CVP Analysis
- Unit Contribution Margin Calculation

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