These costs are typically the expenses you pay out regularly that do not go up or down with your sales level. Total expenses consist of two cost components: fixed costs and variable costs.įixed costs are those expense items which generally do not change in the short run, regardless of how much you produce or sell. To use the break-even technique, you need to do further analysis of your expenses so that you can classify them as either "fixed" or "variable." You will find most expenses listed under the heading "Operating Expenses" or "General and Administrative Expenses." Additional expenses to include in your analysis are found on the line labeled "Cost of Goods Sold," which appears on income statements for retailers and manufacturers. Total expenses also appears on your income statement (or projections). This will work for any of the calculations outlined in this guide. If your business is brand new and you have no income statement yet, you will need to use a projected sales figure. Net sales revenue is all sales revenue (often called "Gross Revenue") less any returns and allowances. The amount of sales revenue should be readily available on your income statement as net sales. The break-even point, in mathematical terms, is simply the point where: mathematical formula to determine the sales level at which the business neither incurs a loss nor makes a profit. Basic Definitionsīreak-even analysis is the use of a simple. Break-even analysis is a very useful tool because it can help you understand the sources of profit in your business.
BREAK EVEN POINT HOW TO
In this guide, you will learn what break-even analysis is see examples of how the technique works in manufacturing, retailing, and service businesses and find out how to use it in your own business planning.
These are some of the questions that you can easily answer by using simple break-even analysis. In your business planning, have you ever asked: How much do I have to sell to reach my profit goal? How will a change in my fixed costs (rent, for example) affect my net income? How much do my sales need to increase in order to cover a planned increase in advertising costs? What price should I charge to cover my costs and allow for a planned amount of profit?
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