Break-even planning can be used by businesses in their day-to-day planning and operations, such as: This helps them figure out if the new venture or product would reap such profits that would make the expenses worthy of reaching that goal.īreak-even planning is done for many activities and operations and isn’t just limited to determining start-ups and product launches. This is why businesses perform break-even analysis before they start operating or before they market a new product. you may need to sell a lot more products to achieve break even, it is a good time to analyze the situation in a holistic approach. Once you have successfully formulated your break-even point, you will have to apply the analysis on actionable tasks to achieve that point.Īt this stage, if your current plan seems unfeasible, eg. Any revenue earned beyond that contributes to net profit. Iv) Profit: When your business sales are equal to the fixed and variable costs, you achieve break-even. Once the contribution margin ratio is determined, you can proceed to calculate your break-even cost by cutting down on expenses or increasing revenue. Iii) Contribution margin ratio: This number is calculated by subtracting fixed costs from the contribution margin. The differential is used to recover the fixed costs. Ii) Contribution margin: The contribution margin is determined by subtracting the item’s variable cost from the selling price. I) Fixed costs: Fixed costs include rent (store & production), assets like computers, software, advertising, and PR costs, etc. To simplify both the formulas mentioned above, the components used can be described as – The contribution margin is determined by subtracting variable costs from the price of the product. To calculate Break-even points based on sales, divide fixed costs by the contribution margin. To calculate the break-even point per unit, you need to divide the fixed cost by revenue per unit, subtracted by variable cost per unit.īreak-even point= Fixed Costs ÷ Contribution Margin Revenue is the price for which products are sold minus variable costs like materials, labor, etc. It can be based on sales or the number of units.īreak-Even Point (Units)= Fixed Costs ÷ (Revenue per Unit – Variable Cost per Unit).įixed costs are expenses that do not change irrespective of the number of units sold. There are more than a few ways to calculate your break-even point. Increase of price or volume of sales to make up for the increase in fixed costs.Impact of reducing price/volume of sales.Number of units to sell before earning profitability.Point of declining sales where business starts to incur a loss.Profitability of current products/services.Additionally, calculating the break-even point is critical in identifying critical sales drivers, whether it is the volume of sales, average production cost, or sales price.īu understanding your break-even point, you can identify: Knowing what the break-even point for your business is will help you in deciding costs, allocating sales budgets, and preparing business plans. If a business is making a lot of money, it does not necessarily mean that it is running profitably. Why is calculating the break-even point is important? Variable costs include raw materials, packaging, transportation, and other expenses related to production. Variable costs are expenses that directly relate to the volume of production. These costs are free from production and must be incurred even in the absence of production. Fixed costs include rent, salaries, taxes, interests, labour, depreciation and other operational costs. There are two components of the break-even analysis:įixed costs are costs that are determined when an idea goes into the production stage and depends on the level of production. To put it in layman’s terms, the point where you finally recover all the capital costs borne to set up the business. The Break-even point is the point where your total expenses match the total revenue, a point without any profit or loss, i.e. To determine the profitability of one’s business, it is important to calculate the break-even point.
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