Breakeven point calculator: Define your point of profit and loss
The breakeven point in business is the point of zero profit and zero loss. However, balancing a multitude of costs can be difficult and having a calculator may help you assess your potential product or service easily. Based on your unit sales and a few other simple details, you may then see your potential revenue and profit. Lets begin by reviewing what this calculator may be used for, then progress on how you may actually use it.
What is the breakeven point?
The breakeven point quite simply refers to the revenue needed to cover a company’s total fixed and variable expenses for products and services. It is only possible to breakeven when the selling price of the product or service is higher then the cost to the company to provide such products or services. Thus, the breakeven point will always vary between individual businesses.
The term, breakeven point, is used often in financial analysis by entrepreneurs, accountants, managerial executives, and in marketing. When a company provides a certain product or service, they must sell a certain amount of units to breakeven, otherwise they are operating at a loss. Therefore, identifying multiple breakeven points can help to provide a dynamic view of the relationships between sales, costs, and profits.
How to create multiple breakeven analyses easily
The breakeven analysis calculator is very easy to use. By inserting different unit prices into the calculator you may obtain a number of breakeven points for each possible scenario and price charged.
For instance, if you want to implement a lower price for a seasonal promotion, you can identify how many more units need to be sold in that time frame to maintain the breakeven point- while simultaneously understanding how increasing the price would alter the amount of sales required. By graphing these breakeven points you may then identify the total cost curve to show the total cost associated with each possible level of output.
How to reduce breakeven point
It is possible for a company to fall short of its initial sales projections for a variety of reasons, such as economic conditions, ineffective marketing, incorrect calculations, or tight margins. Therefore, if the company comes to a point where they are unable to sell the amount of units needed to breakeven, they have a couple options to reduce the breakeven point:
1. Re-assess the unit sales price. By reducing the profit margin or offering better buyer incentives the company may make enough unit sales to reach a lower breakeven point.
2. Reduce fixed costs. Costs such as rent or loan repayments may need to be negotiated or refinanced at lower rates.
3. Reduce variable costs. Costs of materials or services may be lower through different suppliers to create better profit margins and further lower breakeven points.
Please continue reading for a detailed explanation of how to use the calculator and how to interpret the results.
How to use the breakeven analysis calculator- step by step
The breakeven point calculator is comprised of two parts: an information intake and integrated results. In order to use the calculator most effectively you must have a good understanding of your company finances, as well as your product or service costs.
Step 1. Begin by inputting your expected unit sales into the first line of the calculator, using the arrows to make this selection even easier.
Step 2: Identify your fixed cost on the second line of the calculator. In this figure you should include all business expenses that are not dependant on the goods or services produced by the business such as rent, advertising, salaries, and loan repayments.
Step 3: You should add your projected sales price per unit on the third line of the calculator. This is the market value intended for your product or service, and this element that may be manipulated to graph multiple breakeven points to find a total cost curve.
Step 4: Finally, define your variable unit cost on the fourth line of the calculator. The variable unit cost is proportionate to the product or service and should consider details such as manufacturing fees, material prices, and/or labour costs per unit.
Step 5: Proceed to view your breakeven point results.
Quick Tip #1:
When making your breakeven calculations it is best to calculate for a defined ‘period’ of time in the business such as monthly, quarterly, semi-annually, or yearly.
Keep in mind your fixed costs will change depending on the period you are calculating for, along with the expected unit sales. For instance, in one month a company will pay less rent then they would in one-year, but also project fewer sales.
Quick Tip #2:
If employees are paid by salary, independent of the hours worked, this is a fixed cost. However, hours of hourly employees can vary greatly depending on the demand of the product of service, making this a variable cost.
Your breakeven point results
Once these details are added to the breakeven point calculator, you may view your results through several information prompts, graphs, and tables to assist in your understanding.
Immediately to the right of the information intake is a prompt summarizing various totals. Here you may find the your total variable cost, which is the cost to produce all your projected units, along with your total costs which factors in your fixed cost for the period. Below that you may see the total revenue from selling your units at your projected market price, along with your net profit after costs.
The first integrated report is called the Breakeven Analysis. Here you may see a line graph representation of your product or service projections. Your fixed costs span across the red line, while total costs are in blue and total revenue is in green. The breakeven point is the exact instance where the blue and green lines intersect. You may hold your mouse over any point on the line graph to get an exact dollar value and sale volume. For a more detailed summary, please proceed to the next tab.
Profit by units sold provides a detailed breakdown of the costs and profit for incremental unit sales. The breakeven point is where the fourth column, profit, reaches zero. With this table you may view in detail any of the other columns outlining fixed cost, total costs, and total revenue for the progression of your total unit sales.
Formula to breakeven
The goal of identifying the breakeven point is for total revenue and total costs to be equal. Therefore, in order to identify the number of required units to breakeven, you must balance the total fixed costs against the profit margin. This can be expressed using the following formula:
TFC = X
TFC is the total fixed costs.
P is the unit market sale price.
V is the unit variable cost.
Limitations of the breakeven analysis calculator
While the breakeven analysis calculator is a great tool to predict the profitability of a certain product or service, it works with hypothetical future sales and thus cannot guarantee the actual market demand for your product or service.
The calculator also assumes that the quantity of units sold is equal to the quantity of units produced and there is no inventory carry over.
While for multiproduct companies the calculator assumes that the proportions of units sold and units produced are constant, which is rarely the case in sales.
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