{"id":6543,"date":"2021-02-03T03:23:27","date_gmt":"2021-02-02T14:23:27","guid":{"rendered":"https:\/\/theaccountinghub.co.nz\/resources\/break-even-analysis\/"},"modified":"2021-02-03T03:23:28","modified_gmt":"2021-02-02T14:23:28","slug":"break-even-analysis","status":"publish","type":"resource","link":"https:\/\/theaccountinghub.co.nz\/resource\/break-even-analysis\/","title":{"rendered":"Break-even analysis"},"content":{"rendered":"<div><\/div>\n<p>The break-even point is the point at which your company makes enough money to cover its costs. Past this point, the company starts to make profit. Finding the break-even point through the analysis of costs is one of the most useful processes an entrepreneur can undertake. It helps you answer questions such as:<\/p>\n<ul>\n<li>What volume of sales do I need to break even?<\/li>\n<li>What profit can I expect from a particular volume of sales?<\/li>\n<li>What price should this product be sold at?<\/li>\n<li>Should advertising be increased or decreased?<\/li>\n<\/ul>\n<h3>How to carry out a break-even analysis<\/h3>\n<p><strong>1. Separate your variable costs from your overheads<\/strong><\/p>\n<p>Make a tally of all your costs separated by type &ndash; either fixed or variable. If you come across a mixed cost, like a bill with a flexible usage fee and a flat subscription cost, work out which is the greater part and add it to the appropriate list. You want to finish knowing two things: your <strong>total fixed costs<\/strong> and the average variable cost of providing one product or service (known as the <strong>variable cost per unit<\/strong>). If you take away the variable cost per unit from your sales price, you have your <strong>contribution (or profit) margin<\/strong>.<\/p>\n<p><strong>2. Now carry out the following calculation to find your break-even point<\/strong><\/p>\n<div class=\"alert alert-info\" role=\"alert\"><strong>TOTAL FIXED COSTS &divide; CONTRIBUTION MARGIN = SALES VOLUME REQUIRED TO BREAK EVEN<\/strong><\/div>\n<div class=\"well\"><strong>Example:<\/strong><br \/>\nA window cleaner has fixed costs of $15,000, while the business&rsquo;s variable costs average $15 per job and the charge out rate is $40 per job, so his contribution margin is $25. To break even he needs to carry out:<br \/>\n$15,000 &divide; $25 ($40 &ndash; $15) = 600 jobs<br \/>\nFor a more honest estimate of viability, the business owner factors their own salary into the fixed costs part of the equation.<\/div>\n<h3>Dollars<\/h3>\n<p>To obtain a dollar break-even point, you need to express the contribution margin as a decimal figure converted from a percentage. For example:<\/p>\n<p>$25 = 62.5% of $40<\/p>\n<p>62.5% = 0.625<\/p>\n<p>Now simply divide the fixed costs by the contribution margin (decimal figure). So, our window cleaner&rsquo;s annual sales target to cover costs would therefore be:<\/p>\n<p>$15,000 &divide; 0.625 = $24,000<\/p>\n<h3>Hours<\/h3>\n<p>If your business is a service provider that charges an hourly rate, you&rsquo;ll want to know your hours-worked break-even point. Simply divide your fixed costs by your hourly call out rate. Say, for example, our window cleaner decided to charge $40 by the hour, after finding out a minority of jobs were taking up a lot of his time. His hours target to reach break-even would be:<\/p>\n<p>$15,000 &divide; $40 = 375 HOURS<\/p>\n<p>Again, in both cases, he&rsquo;d be wise to factor his salary expectations into his costs for a truer figure.<\/p>\n<h3>Advertising spend<\/h3>\n<p>While break-even analysis is typically used to set a sales benchmark or estimate when a business will become profitable, it is also a fundamental tool when it comes to budgeting advertising dollars. Many businesses neglect to apply any analysis to advertising spend at all, especially if they are used to a set spending pattern every year. However, applying a break-even analysis to your advertising spend tells you exactly how effective that ad must be before the cost is paid for and it starts to help you make a profit.<br \/>\nThe calculation is virtually identical to the standard equation &ndash; just replace your fixed costs with the cost of the ad:<\/p>\n<div class=\"alert alert-info\" role=\"alert\"><strong>ADVERTISING SPEND &divide; CONTRIBUTION MARGIN = SALES VOLUME REQUIRED FOR ADS TO BREAK EVEN<\/strong><\/div>\n<div class=\"well\"><strong>Example:<\/strong><br \/>\nThe owner of a city garage and auto service shop is being offered a &lsquo;cut-price&rsquo; deal to advertise in a monthly car magazine &ndash; a full page ad for $4,000. At the same time, he knows he sells a car service for $200, with the variable costs per service being $65. A break-even analysis would tell him he will need to carry out 29 extra services than usual during the month before he doesn&rsquo;t lose any money on the cost of the ad:<br \/>\n$4000 &divide; ($200 &ndash; $65) = 29 services<\/div>\n<h3>Weighted average price<\/h3>\n<p>Most companies make multiple products that cost varying amounts to make, yet their owners still need to know a single break-even point. To work this out, they multiply the price of each product by the average quantity they estimate to sell, before adding together a total of results, such as:<\/p>\n<div class=\"table-responsive\">\n<table class=\"table table-striped\">\n<tbody>\n<tr>\n<th scope=\"row\">100 item X @ $2<\/th>\n<td>=<\/td>\n<td>$300<\/td>\n<\/tr>\n<tr>\n<th scope=\"row\">200 item Y @ $3<\/th>\n<td>=<\/td>\n<td>$600<\/td>\n<\/tr>\n<tr>\n<th scope=\"row\">400 item Z @ $5<\/th>\n<td>=<\/td>\n<td>$2,000<\/td>\n<\/tr>\n<\/tbody>\n<tbody>\n<tr>\n<th scope=\"row\">700<\/th>\n<th scope=\"row\"><\/th>\n<th scope=\"row\">$2,800<\/th>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>Dividing the total forecasted sales value by the total units they forecast to sell gives them a weighted average price = $4. This can then be used along with their weighted variable cost per unit (found using the same method) in a break-even equation.<\/p>\n<\/div>\n","protected":false},"featured_media":6544,"template":"","content-topic":[84],"content-type":[3],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v22.7 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Break-even analysis - The Accounting Hub Limited<\/title>\n<meta name=\"robots\" content=\"noindex, follow\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Break-even analysis - The Accounting Hub Limited\" \/>\n<meta property=\"og:description\" content=\"The break-even point is the point at which your company makes enough money to cover its costs. Past this point, the company starts to make profit. 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