But, above the break-even point, every dollar of sales is pure profit. If you are producing and selling products, you need to know if these products are profitable.
Creating a break-even analysis will give you the information you need on profitability. You should construct a break-even table to show break-even points for various sales volumes and unit prices for each product. A lender or investor will probably want to see this information in the financial report section of your business plan.
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By Jean Murray. A break-even analysis is important in several different situations:. Also consider Use planning to improve your business and take advantage of opportunities. Learn how to make your business more profitable.
Read more about setting sales targets and improving customer service. Learn more about monitoring your financial performance.
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For example, you could add up all fixed costs for a year or a month, depending on which period you want to measure. Your variable expenses go up the more products you sell. These costs include purchasing inventory, shipping and manufacturing a product. Variable expenses include salaries for sales and production personnel, as well as warehouse personnel and shipping employees.
Divide all of your variable expenses by the number of products sold to arrive at your per-unit variable costs.
Your break-even point equals your fixed expenses divided by the result of subtracting per unit variable costs from the unit sales price. This comes to Because your variable costs go up the more products you sell, it can be difficult to know your break-even point looking ahead. Every time you sell more, the variable costs go up. If these costs rise at a predictable rate, you can estimate the cost of units versus units, for example.
Leave a Comment. Share Now! If our designer bag store owner wanted to break even by selling even fewer bags per month, she might want to look at reducing her costs. It may also help you determine whether you need to take cost-saving measures to try and achieve the same quality at a reduced price. Everything over this critical point can be booked as profit. Latest on Entrepreneur. This concerns for instance selling costs, production costs, fuel and other costs that are directly related to the production of goods or an investment in capital.