Operating a business successfully requires avoiding the pitfalls that can cause the business to fail. One important figure that can help a business avoid these pitfalls is the break-even point. The break-even point can serve as a baseline with which to make important business decisions that are imperative in operating a successful business.
Instructions
1. Ascertain the fixed costs of the business product or the service the business provides. Fixed are the costs that will not change regardless of output. Examples of fixed cost are facility rental, salaries, utilities and insurance.
2. Determine variable costs. These costs relate directly to units sold or customers serviced. A good example is a person that has a clothing company--the variable costs would be the expense for the clothes, printing materials and number of machines needed to produce the clothes.
3. Compute the gross profit margin by taking total profit from a given number of sales or revenue. Then subtract total variable costs and this figure is the gross profit margin. A business can also calculate gross profit margin on a per-unit-basis. For example, if product variable costs are twenty dollar per unit and it sells for thirty dollars then gross profit margin is ten dollars per unit sold.
4. Restate the gross profit margin in percentage terms. Using the previous example, variable cost are twenty dollars per unit and gross profit per unit is ten dollars. Now divide ten by twenty and the result is fifty percent.
5. Calculate the break-even point. Fixed costs divided by the gross profit margin is the calculation for the breake-ven point. Assume a fixed cost of fifty thousand dollars in the previous example. Therefore, we get fifty thousand divided by fifty percent. The result is a break-even point of one hundred thousand dollars.
