Break-even analysis is a very useful accounting technique.It is part of a larger analytical model called cost-volume-profit analysis, and it helps you determine how many product units your company needs to sell to recover its costs and start realizing profit.It is a matter of following a few steps to learn how to do a break-even analysis.
Step 1: Determine the company's fixed costs.
Fixed costs aren't dependent on the volume of production.Rent, insurance, property taxes, loan payments and utilities are examples of fixed costs, which means you will pay the same amount for them no matter how many units you produce or sell.Add all your firm's fixed costs together.
Step 2: Determine your company's variable costs.
Along with production volume, variable costs are those that will change.The cost of buying oil filters varies depending on the number of oil changes the business performs.The company can allocate the cost to each oil change based on the number of oil filters they buy.raw materials, commissions paid to sales people, freight in and freight out are examples of variable costs.
Step 3: Determine the price of your product.
Pricing strategies are part of a much more comprehensive marketing strategy.Knowing your true costs is important because you know that your price must be at least as high as your production costs.Anti-trust legislation outlaws selling below cost.Other pricing strategies include knowing the price sensitivity of your target market, finding out what competitors are charging and comparing product features, and calculating how much revenue you need to generate a profit and expand the business.Price alone doesn't drive sales.Good value will be paid for by people.You want to increase your market share so you can be the price driver.
Step 4: You can calculate the unit contribution margin.
The unit contribution margin is how much money each unit brings in.The variable costs are subtracted from the sales price.Consider using an oil change business.When expressed in other currencies, the sales price of an oil change is $40.Each oil change costs 3 things: a $5 oil filter, $5 can of oil, and $10 in wages for the technician.The variable costs are associated with an oil change.The contribution margin is based on the number of oil changes.After recovering its own variable costs, providing an oil change to a customer brings the company $20 in revenue.
Step 5: The margin ratio is calculated.
You can use this percentage to determine the profits that will result from various sales levels.Divide the contribution margin by sales to calculate it.Divide the contribution margin by the sales price.A contribution margin ratio of 50% is the result.
Step 6: The company's break-even point is calculated.
The break-even point is the amount of sales you have to achieve to cover your costs.Dividing your fixed costs by your product's contribution margin is how it is calculated.All of your company's fixed costs for a given month are $2000.2000 / 20 is the break-even point.The company breaks even when 100 oil changes are performed in a single month.
Step 7: Determine your expected losses and profits.
You can estimate your expected profits once you have calculated the break-even volume.Revenue will be equal to the contribution margin for every additional unit sold.Each unit that is sold above the break-even point will make a profit, while each unit sold below will lose money.
Step 8: Determine projected profits.
Imagine your business gives you 150 oil changes in a month.Only 100 oil changes were needed to break even, so the additional 50 changes will generate a profit of 20 dollars each, for a total of 50 dollars or more.
Step 9: Determine projected losses.
Imagine only 90 oil changes in a month.You sustained a loss because you didn't achieve your break-even volume.Each of the 10 oil changes under your break-even volume generated a loss of $20, for a total of 20 or $200.