Section B5: Break-even Analysis

Introduction

The break-even point is defined as the level at which sales revenues equal expenses, resulting in no profit or loss for the accounting period.

To calculate the break-even point we must determine:

  • The sale price
  • Fixed costs
  • Variable costs

Sale Price

The sale price is the revenue generated from the sale of the product or service.

Fixed Costs

Fixed costs are costs which do not vary proportionately with sales volume. They include the cost of insurance, rent and leases.

Variable Costs

Variable costs are costs which vary directly with sales volume. They include the cost of goods for resale and sales commissions.

Break-Even Point Formula

S = FC + VC or

S = FC / GM

Where:

S = break-even level of sales

FC = fixed costs

VC = variable costs

GM = gross margin as a % of sales

Break-even Analysis

Figure 3 shows a Break-Even Analysis.

Figure 3: An Example of a Break-even Analysis

Break-even Analysis for Children’s Clothing Retail Store 
FIXED COSTS $
Advertising 5,000.00
Bank Charges 1,500.00
Business Taxes 1,000.00
Office Expenses 1,500.00
Rent and Utilities 24,000.00
Telephone 2,400.00
Vehicle Expenses 3,700.00
Wages and Benefits 22,000.00
TOTAL ANNUAL FIXED COSTS 61,100.00
 
GROSS PROFIT MARGIN (GPM) $
Selling Price 50.00
Cost 30.00
Gross Profit 20.00
Gross Profit Margin = Gross Profit
Selling Price
= $20.00
$50.00
= 40%
Mark-up = Gross Profit
Cost
= $20.00
$30.00
= 67%
Break-even Point = Total Fixed Costs
Gross Profit Margin
= $61,100
.40
= $152,750 
The retailer in this example must make $152,750 in sales per year or a monthly average of $12,730.00 before any profit is made.

Click on Worksheet 6.10 to complete a break-even analysis for your business.

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