Break even point analysis is an important part of planning any start up. It is that point of time when your business has generated enough revenue to cover your initial cost. It also covers any fixed and variable costs incurred on a monthly basis.

Cheaper phones manufactures will happily flood the market as they are looking at a smaller profit margin with the aim of high unit sales. Of course, as with fixed costs, one business’s variable costs could be another business’s fixed cost. If your company has a twelve-month contract for local newspaper advertising, you might want to consider advertising a fixed cost. The break even analysis helps you calculate out your break-even point. If you are an Uber driver and you enter for the selling price per unit the average price per trip, then your BEP is the number of trips you must make.

Fixed Costs

You might decide to raise the prices, but the comparable items in the market must be considered before doing that. For example, raising prices doesn’t necessarily mean more profit as sales are typically demand led. That means that the more people want things, the higher the demand. The less availability, the easier it is to increase the relative value of a product. This is why big companies like apple release their new iPhone in a controlled manner. Their strategy being to create demand and sustain that demand for as long as possible to keep the prices high.

If you sell less than that, you make a loss, and if you sell more than that, you make a profit. The BEP is the number of units that you must sell for a deal or business to break-even. Then from time-to-time, you may tweak the numbers and rerun your break-even analysis. The point being is, what the break-even point analysis means depends on how you entered the numbers. This calculator will help you determine the break-even point for your business.

Considerations for semi-variable costs

1. Increasing product lines may be a cheap solution (say you have a shop or warehouse, adding more product lines will likely add little to your holistic operational costs).
2. That means that the more people want things, the higher the demand.
3. If you enter your average income per day, then the BEP is the number of days you must drive to break even.
4. If you are a house painter, and your average price for painting a house is $7,000, a break-even analysis will calculate how many homes you must paint each month to cover your costs.

Or perhaps you are an Uber driver who wants to know your break-even point. In that case, your BEP is the average number of trips you must make. If you are a house painter, and your average price for painting a house is $7,000, a break-even analysis will calculate how many homes you must paint each month to cover your costs. It will quickly calculate the units you need to sell to reach the break-even point (BEP). The difference between a business that sells a service versus one that manufactures or resells a product is, a manufacturer or reseller has component costs. On the other hand, you may decide to enter your average income per day, and then your BEP will be the number of days you need to drive.

For example, utility costs incur monthly but are considered variable because they change in proportion to energy usage. If your business sells a product, enter the cost of the components that go into making the product. Make sure to enter the component costs consistently relative to the unit selling price. Imagine you sell hotdogs, and you want to know how many hot dogs you need to sell to reach your BEP. You buy hotdog rolls in packages of a dozen, and the hotdogs in boxes of forty-eight.

You should not enter the total cost of a package of rolls and a package of hotdogs. Instead, you should enter the cost of an individual roll and a single hotdog. The calculations will show you if your prices are compatible with your break even units goals.

How to Calculate the Break-Even Point for a Service Business

One business’s fixed costs could be another business’s variable cost. If your company has an accountant under a monthly retainer, your analysis should consider the retainer fee as a fixed cost. The Break-Even point is where your total revenue will become exactly equal to your cost. At this point the profit will be 0 and any income earned beyond that point would start adding into your profits. You might want to add new products to sell to reach the break even point. This can be particularly useful if you are considering break even from an overall business perspective.

Once you know the number of break even units, it will give you a target which you and your staff can aim towards. A break even point could be an ongoing target, say 20 units per week. This provides motivation to work toward your goals and forms a Key Performance Indicator (KPI) that your sales and operations teams can use as a tangible benchmark for success. On the basis of values entered by you, the calculator will provide you with the number of units you would require to reach a break-even point.

Increasing product lines may be a cheap solution (say you have a shop or warehouse, adding more product lines will likely add little to your holistic operational costs). When taking this approach, it is important to consider the product break even point (or line item break even point) as well as the overall break even point for the business or sub business units. It’s important to study the feasibility of any project or new product line that you’re planning to launch. With break-even analysis, you can identify the time and price at which your business will turn profitable. This helps you plan the range of activities you need to reach that point, set up a turnaround time for your tasks, and stick to a timeline.

Costs are fixed for a set level of production or consumption and become variable after this production level is exceeded. For example, fixed expenses such as salaries might increase in proportion to production volume increases in the form of overtime pay. Whether you’re trying to promote your brand-new product, stay ahead of your competitors, or cut down on your expenses, you need to have a strategy in place.

Variable Costs

If you enter your average income per day, then the BEP is the number of days you must drive to break even. Remember, the break-even point is the number of units you must sell so that your business has neither a profit nor a loss. Notice how the calculator automatically calculates the cumulative cost total. Since Jill wants to know how many hours she needs to bill a month, she will enter all expenses as monthly expenses. So, the break even point corresponds to the number of units you need to sell in order to break even.

Fixed costs are costs that are incurred by an organization for producing or selling an item and do not depend on the level of production or the number of bearer bonds meaning units sold. Some common examples of fixed costs include rent, insurance premiums, and salaries. You can see that all of these costs do not change even if you increase production or make more sales in a particular month. When you know exactly how many units you need to sell to reach the break even point, it becomes easier to plan ahead of the time. So, your break even plan will form your datum point at which you become profitable.

With the break even result you can start to analyze the micro components that create the overall cost. Quantifying those components correctly allows you to chart of accounts and bookkeeping for a consulting business identify areas where you may be able to cut costs. To estimate monthly amounts for these payments, simply divide the cost amount by 12. For fixed costs incurred on a quarterly basis, divide the cost amount by four. Variable costs are those items that change over time and are not required.