The breakeven point in business is the point of zero profit and zero loss. Balancing production costs can be difficult and having a calculator may help you assess your product or service easily. All you need to include is 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 and progress on how you can use it.
What is the breakeven point?
The breakeven point 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 it. The breakeven point will always vary between individual businesses.
The term, breakeven point, is used often in financial analysis. It is used by entrepreneurs, accountants, managerial executives, and in marketing. When a company provides a certain product or service, they must sell a certain amount to breakeven. Otherwise, they are operating at a loss. Identifying multiple breakeven points can help to understand the relationship between sales, costs, and profits.
How to reduce breakeven point
It is possible for a company to fall short of its initial sales projections for a variety of reasons. This can be due to economic conditions, ineffective marketing, incorrect calculations or tight margins. If the company can’t sell the amount of units needed to breakeven, they have a couple options:
1. Re-assess the unit sales price. Offering better buyer incentives can help the company make enough 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. This can improve profit margins and lower the breakeven point.
Please continue reading for a detailed explanation of how to use the calculator and how to interpret the results.
What is this calculator for?
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. This will give you an outcome for each possible scenario and pricing.
For instance, say 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. Then, figure out how increasing the price would alter the number of sales required. By graphing these breakeven points you can identify a total cost curve. This will provide you the cost associated with each level of output.
The goal of identifying the breakeven point is for the revenue and costs to be equal. To identify the required units to breakeven, you must divide the total fixed costs by the profit margin. This can be expressed using the following formula:
TFC is the total fixed costs.
P is the unit market sale price.
V is the unit variable cost
Limitations of the breakeven analysis
The breakeven analysis calculator is a great tool to predict the profit of a product or service. It works with hypothetical future sales and cannot guarantee the actual product demand.
The calculator also assumes that the units sold are equal to the units produced. It does not account for any inventory carry over. For multiproduct companies the calculator assumes that the units sold and produced are constant. This is rarely the case in sales.
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How to use the calculator
The breakeven point calculator is made of two parts: an information intake and integrated results. In order to use the calculator you should have a good understanding of your company finances. It helps to know about your product or service costs too.
Step 1: Begin by inputting your expected unit sales into the first line of the calculator. You can use 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 expenses that are not dependant on what is produced by the business. Fixed costs can be 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. This element can be manipulated to graph multiple breakeven points and 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 relative to the product or service. It 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. Common periods include monthly, quarterly, semi-annually, or yearly.
Keep in mind your fixed costs and unit sales will change depending on the period you are calculating. 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. That makes this a variable cost.
Once these details are added to the breakeven point calculator, you may view your results. There are 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. You can also see your total costs, which variable plus fixed costs for the period. Below that you can view the total revenue from sales 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. The 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 and total costs. You can also see the total revenue for your sales.