Break Even Analaysis

 

Fixed costs are those that remain the same no matter how much product or service is sold. In general, lower fixed costs lead to a lower break-even point.

A business will want to use a break-even analysis anytime it considers adding costs—remember that a break-even analysis does not consider market demand.

There are two basic ways to lower your break-even point: lower costs and raise prices.

A break-even analysis is a financial calculation used to determine a company’s break-even point  Or, you might just be thinking about expanding a product offering or hiring additional personnel.

 

You may have an idea that spurs you to open a business or launch a new product on little more than a hope and a dream. For example, if a suitcase sells at $125 and its variable cost is $15, then the contribution margin is $110. In other words, it reveals the point at which you will have sold enough units to cover all of your costs. At that point, you will have neither lost money nor made a profit.

A break-even analysis reveals when your investment is returned dollar for dollar, no more and no less, so that you have neither gained nor lost money on the venture.

A break-even analysis is a financial calculation used to determine a company’s break-even point   include direct hourly labor payroll costs, sales commissions and costs for raw material, utilities and shipping. Examples of fixed costs include facility rent or mortgage, equipment costs, salaries, interest paid on capital, property taxes and insurance premiums.

Variable costs rise and fall according to changes in sales. For example, if it costs $10 to produce one unit and you made 30 of them, then the total variable cost would be 10 x 30 = $300.

The contribution margin is the difference more than  between the product’s selling price and its total variable cost. This margin contributes to offsetting fixed costs.

The average variable cost is calculated as your total variable cost divided by the number of units produced.

In general, lower fixed costs lead to a lower break-even point—but only if variable costs are not higher than sales revenue.

It can tell you whether you may need to borrow money to keep your business afloat until you’re pocketing profits, or whether the endeavor is worth pursuing at all.

A break-even analysis is a financial calculation that weighs the costs of a new business, service or product against the unit sell price to determine the point at which you will break even. It is an internal management tool, not a computation, that is normally shared with outsiders such as investors or regulators. Variable costs are the sum of the labor and material costs it takes to produce one unit of your product.

Total variable cost is calculated by multiplying the cost to produce one unit by the number of units you produced. A break-even analysis will reveal the point at which your endeavor will become profitable—so you can know where you’re headed before you invest your money and time.

A break-even analysis will provide fodder for considerations such as price and cost adjustments. However, financial institutions may ask for it as part of your financial projections on a bank loan application.

The formula takes into account both fixed and variable costs relative to unit price and profit. It’s wise, however, to limit your risk before jumping in.

You may have an idea that spurs you to open a business or launch a new product on little more than a hope and a dream. Or, you might just be thinking about expanding a product offering or hiring additional personnel. It’s wise, however, to limit your risk before jumping in. A break-even analysis will reveal the point at which your endeavor will become profit.

A break-even analysis has broad uses on its own merit. But it’s also a critical element of financial projections for startups and new or expanded product lines. Use it to determine how much seed money or startup capital you’ll need, and whether you’ll need a bank loan.

More mature businesses use break-even analyses to evaluate their risks in a variety of activities such as moving innovative ideas to production, adding or deleting products from the product mix and other scenarios. One example is in budgeting the addition of a new employee. A break-even analysis will reveal how many additional sales it will take to break even on expenses associated with the new hire.

What Is a Standard Break-Even Time Period An acceptable break-even window is six to 18 months. If your calculation determines a break-even point will take longer to reach, you likely need to change your plan to reduce costs, increase pricing or both. A break-even point more than 18 months in the future is a strong risk signal.

In other words, you should use a break-even analysis to determine the risk and value of any business investment, especially when one of these three events occurs: