Step 21: Calculate Breakeven Point
The Concept:
A new entrepreneur must calculate a very important piece of data -- the breakeven point -- to fully grasp the relationships of price, cost and volume and how they affect the company.
What you need to know:
Stated simply, the breakeven point shows what level of sales (in unit volume or dollars) is needed to offset all fixed costs of doing business and the variable costs of producing products. Fixed costs are expenditures on which the level of sales has no effect, including rent and loan or lease payments. Variable costs are affected directly by sales volume and can include labor wages and utilities. For instance, costs for hourly workers and electrical consumption can fluctuate a few dollars per month, depending upon how sales are proceeding.
The equation is easy: Fixed costs divided by the retail price of the product minus the variable costs to produce the product. If, for instance, your fixed costs total $900 per month, and your product sells for $50 but costs $25 to produce, your breakeven point is calculated like this:
$900 / ($50 - $25) = 36 units sold to break even.
Points to consider:
Is the break-even point attainable?
Given market conditions, can it be exceeded?
Given market conditions, is this business proposal still viable? Will the marketplace allow sales to be at a level that you can meet financial goals? |
