Many figures and calculations are estimates, especially if the business has not yet begun. The company must consider this goal separately from other goals, such as profit. Additionally, there are a number of other figures to consider, such as sales revenue, taxes, and other financial factors.Ī comparison of all the figures will be conducted to determine when the company will break even.
Realistic income figures should be used, not ideal ones. Sales generated each year or month should be used to calculate revenue.The starting expenses, overhead, and fixed costs of the business should be weighed against the income and profits.How Should a Break-Even Analysis Be Conducted?īreak-even analysis should include the following points: Low fixed costs generally lead to a lower break-even point, but only if variable costs are not higher than sales. Taking the total variable cost and dividing it by the number of units produced gives you the average variable cost. If a suitcase sells for $125 and its variable cost is $15, the contribution margin is $110. You would incur a total variable cost of $300 if you produced 30 units for $10 each.Ĭontribution margin refers to the difference between the selling price and the product’s total variable costs. The total variable cost is calculated by multiplying the cost per unit by the number of units produced. Each unit of your product has variable costs, which are labor and material costs. Costs for raw materials, utilities, and shipping are examples of variable costs. Fixed costs include facility rent or mortgage, equipment costs, salaries, interest on capital, property taxes, and insurance premiums.Ĭhanges in sales affect variable costs. Regardless of how much product or service is sold, fixed costs remain the same. In the formula, both fixed and variable costs are considered in relation to unit price and profit. When you apply for a bank loan, financial institutions may ask for it as part of your financial projections. Investors and regulators use it as an internal management tool, not as a computation. Using break-even analysis, a company determines its break-even point (BEP).