Example 1
Then, based on this historical information and actual percentage to sales
relationships of expense items, you can estimate how much gross margin those
expenses will likely consume. Equipped with this information, you can now make
any necessary adjustments to gross margins or expenses to ensure the profitability
of the business.
In the example above, what we are illustrating is that
.088 (the GM) x $2,579.55 (Sales) = $227.00
(the sum of the FC+VC)If you are selling products, you may translate the dollar break-even point into units
of product by simply dividing by the unit cost of the product.
(See the two examples below)
To arrive at sales objectives for your sales people, you now are able to calculate
how many units they must sell before the company starts to make a profit
For some businesses, you may want to extend the exercise to show how many
customers are needed to be profitable. See the example that follows.
Here are two examples of using the break-even point analysis formula:
Money needed per year/month for a break-even point
FC + VC = Fixed Costs + Variable Costs $14,700 per year
GM = Gross Margin 20.7%
BEP = FC + VC/GM (per year)
(BEP means break-even point)$14,700/.207 = $71,014.50 (per year)*BEP per mo. = BEP per year/12
(BEP means sales break-even point)$71,014.50/12 = $5,917.87 (per month)