Section B5: Break-even Analysis
Introduction
The break-even point is defined as the level at which sales revenues equal expenses, resulting in no profit or loss for the accounting period.
To calculate the break-even point we must determine:
Sale Price
The sale price is the revenue generated from the sale of the product or service.
Fixed Costs
Fixed costs are costs which do not vary proportionately with sales volume. They include the cost of insurance, rent and leases.
Variable Costs
Variable costs are costs which vary directly with sales volume. They include the cost of goods for resale and sales commissions.
Break-Even Point Formula
S = FC + VC or
S = FC / GM
Where:
S = break-even level of sales
FC = fixed costs
VC = variable costs
GM = gross margin as a % of sales
Break-even Analysis
Figure 3 shows a Break-Even Analysis.
Figure 3: An Example of a Break-even Analysis
| Break-even Analysis for Children’s Clothing Retail Store | |||||
| FIXED COSTS | $ | ||||
| Advertising | 5,000.00 | ||||
| Bank Charges | 1,500.00 | ||||
| Business Taxes | 1,000.00 | ||||
| Office Expenses | 1,500.00 | ||||
| Rent and Utilities | 24,000.00 | ||||
| Telephone | 2,400.00 | ||||
| Vehicle Expenses | 3,700.00 | ||||
| Wages and Benefits | 22,000.00 | ||||
| TOTAL ANNUAL FIXED COSTS | 61,100.00 | ||||
| GROSS PROFIT MARGIN (GPM) | $ | ||||
| Selling Price | 50.00 | ||||
| Cost | 30.00 | ||||
| Gross Profit | 20.00 | ||||
| Gross Profit Margin | = | Gross Profit Selling Price |
= | $20.00 $50.00 |
= 40% |
| Mark-up | = | Gross Profit Cost |
= | $20.00 $30.00 |
= 67% |
| Break-even Point | = | Total Fixed Costs Gross Profit Margin |
= | $61,100 .40 |
= $152,750 |
| The retailer in this example must make $152,750 in sales per year or a monthly average of $12,730.00 before any profit is made. | |||||
Click on Worksheet 6.10 (Word Document) to complete a break-even analysis for your business.