May 13, 2011
If you can figure out how to perform a break even analysis, you can determine whether or not your company has reached its BEP. Even if you haven’t reached that point yet, performing a break even analysis can help you determine when you will reach that point so that you have something tangible to work toward.
Let’s take a look at the various methods that many companies have used to see how close they were to the own BEPs and you will see yourself how to perform a break even analysis.
When it comes to trying to determine what your company’s BEP will be, there are several factors that you need to consider. Among them are:
Each of these costs goes in to figuring out how to perform a break even analysis. Once you have these costs sorted out, you’ll know exactly how much you need to sell in order to cover all of the costs associated with your business.
In order to figure out exactly what your BPE is, you need to divide your company’s fixed costs by the contribution margin of your of your product.
The contribution margin is what you get when you subtract the variable costs related to a unit of whatever you sell from the sale price of that unit.
Say you run a pizza shop and you want to figure out the margin on a large cheese pizza. Let:
Margin (M) = ?
Price (P) = $12
Ingredients (I) = $3
Wage (W) for the employee who makes the pizza = $7
The formula for the contribution margin would be P – (I + W) = M or 12 – (3 + 7) = 2
This means that you make two dollars off of every twelve dollar pizza that you sell.
From there, you take the fixed costs that you business has over a certain period and divide them by the two dollars that you make on every pizza. This would tell you how many pizzas you need to sell in order to break even over that given period.
The complexity of the formula for how to perform a break even analysis depends on the variety of your offerings. In the above example, for instance, you would need to factor in the different kinds of pizzas you sell, as well as other food items, but the general idea is always the same.
If, after you figure out how to perform a break even analysis, you BEP is higher than you’d like it to be, you can look at your costs and figure out where you can retool certain aspects of your business in order to lower the BEP.
This can range from raising the prices on your products and services to using most cost effective supplies and finding another office space where your rent isn’t as high.
By figuring out how to perform a break even analysis, you can take variables and put them in place of the actual numbers to try and find the best solution for running your business so that you see a healthy profit in no time.