Break-even analysis pinpoints where revenue equals total costs. To calculate your break-even point, take your most current income statement and identify each cost as either fixed or variable.
Fixed costs are independent of sales level, while variable costs rise and fall with sales. Mixed costs involve elements of both. Most costs will fall readily into fixed or variable. For those that don't, allocate 50% to fixed costs, and 50% to variable.
Fixed Expenses: Variable Expenses: ________________________________________________________________ Salaries Sales commissions Office expenses Taxes Payroll tax Sales tax Benefits Boxes, paper, etc. Utilities Travel and Entertainment Rent Freight Licenses and fees Overtime Operating supplies Bad debts Insurance Cost of goods sold Advertising Car/delivery Legal and accounting Postage Depreciation Interest Maintenance and cleaning Dues and publications
Computing Production Needs
It can be most important to small manufacturers to know the quantity of production units they must produce in order to cover the firm's fixed expenses.
This formula is:
Fixed Expenses
Break-even point in units = _____________________________________________
Contribution margin per unit
(unit sale price - variable expenses per unit)
Computing the Break-Even Point in Sales
Where the immediate objective is to find only the sales volume that is necessary to reach the break-even point. The following is a formula for this purpose.
Fixed Expenses
Break-even point in units = _____________________________________________
Contribution margin per unit
_____________________________________________
Selling Price Per Unit
This break-even formula determines how many units the firm must produce and sell to pay for fixed expenses. It subtracts the variable expense per unit from the sales income for each unit. The difference per unit is then applied to fixed expenses. The break-even quantity is the number of units that must be sold to cover those fixed expenses.
Example:
The Successful Company sells decal-decorated T-shirts to its customers for $10.00 each. The shirts cost $4.00 each, and the decal costs $.40. The store pays a $.60 commission to the salesperson. The total variable cost is $5.00. The total of the fixed costs is $1,500 a month.
Using the Formula for Computing Production Needs we find that, dividing the monthly fixed cost of $1,500 by 5.00 gives a break-even point of 300 shirts per month. If we sell 300 shirts at $10 each we generate $3,000 income. Our variable costs total $5 per shirt or $1,500. Add the fixed cost of $1,500 to variable costs of $1,500 equals $3,000.
Breakeven Point = $1,500
_________________________
$10 - $5 = $5 = 300 units
Assumptions and Special Remarks
Describe and give reasons for any assumptions you have made in assembling your business plan. Such as assumptions concerning the economy or your competitors. Document the source of information on which you based your assumptions.
Also, list any special remarks you wish to be known about your business. In the body of your business plan you should footnote where you have made an assumption or have special remarks about a subject in this section.
Appendices
Insert here deeds, titles, leases, licenses, certifications, contracts, letters of recommendations, letters of intent, industry standards, promotional materials, or pertinent articles from the media regarding the industry or your business which are mentioned in your business plan. Footnote your plan so a reader can easily find any document you refer to in the text in the Appendices.