Units Break Even - Definition & Importance
What is Units Break Even?
Units break even refers to the number of units of a product to be sold by a company to break even, or to be simply told to reach the point where there is no profit or loss of the company. The units break even is the quantity and the point at which it takes place is called the break even point. Knowing the units break even is important for a business as companies have an initial target to achieve.
The break even point calculation is very necessary because, that analysis helps us to compare between the sales and revenue to the cost associated with the product or services that have been launches in the market. Break even analysis also determines the units of a product that a company must sell to cover its fixed and variable costs associated with producing the product. The break even point determines whether the company is on the right direction when it comes to a new product or a venture. Reaching the break even point is an indication that the company is doing good. The price strategy to make this effective is break even pricing.
Formula of Units Break Even
Units break even = Fixed costs/ (Sale price per unit – Variable cost per unit)
Units break even = Fixed costs/ Contribution margin per unit
The fixed costs of manufacturing a product or rendering a service are the most important to be recovered. The contribution margin also known as the difference between the sale price and the variable cost incurred in the manufacturing of a product. The contribution margin is also a solid indicator of what the units break even should be, lower the contribution margin, higher in the units break even.
Importance of Units Break Even
The units break even gives us the exact number of units of a products or services to be sold in order to generate enough revenue to cover all fixed costs to say the least. The units break even also cover the costs associated with promoting the product which includes advertising, promotions, etc. These are also called variable costs incurred for the sale of a product. Since all companies are concerned about profit, the units break even becomes an essential indicator or whether the product is on the right track or not.
The faster the break even point is achieved, the better is the company’s performance with that product in the market. It is very essential for the company to know what exactly it’s sales target should be. The units break even helps a company determine that.
This helps the company make plans to reach their financial goals easier. It is also considered a margin of safety measure. The company’s sales have to reach the break even point or the company has the sell the number of units break even, to come to a zero profit or loss point. Therefore, a demand side analysis gives the company significant insight on the selling capabilities. The analysis of units break even is also done by investors to calculate at what price they should break even so that their investment is deemed profitable. The level of fixed cost determines the units break even to be reached, the lower the fixed cost, lower is the amount of the units break even.
Hence, this concludes the definition of Units Break Even along with its overview.
This article has been researched & authored by the Business Concepts Team. It has been reviewed & published by the MBA Skool Team. The content on MBA Skool has been created for educational & academic purpose only.
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