Breakeven is the calculation of sales required to cover costs. It calculates the relationship between three different costs namely – Fixed costs, Variable costs and Selling price. Breakeven point is the point at which costs and revenues are equal. No loss or profit is achieved. The money invested in the business is received and the income earned after this point is calculated as profit or loss.
Q. Are you facing difficulties in calculating breakeven point?
Q. Don’t you know how to calculate breakeven point?
Here are some tips from Kuza Biashara, on how to calculate breakeven point:
To understand the breakeven point calculation, one needs to understand the following points first
Fixed Costs – This includes costs like – rent, insurance, property tax, interest rates, etc. These rates remain unchanged for certain years.
Variable Costs: These costs include direct labor and direct materials. These costs are related to the production costs.
Selling price: It is the price of the units sold. This price does not include the price of the sales tax.
Breakeven point is calculated as under
Fixed costs / (Selling price – Variable Costs)
Example: Rent – 1000 K.sh.
Tax – 100 K.sh.
Total Fixed Cost = Rent + Tax = 1100 K.sh.
Variable Costs: Material – 20 K.sh.
Labor – 30 K.sh.
Total Variable Costs = 50 K.sh.
Selling price per unit = 70 K.sh.
Breakeven point – 1100 / 70 – 50 = 55
As the breakeven point is 55, 55 units have to be sold to achieve the breakeven point.
Apart from the above way of calculating it, there is an online breakeven analysis calculator available. This not only calculates the loss and profit statements of the company’s performance, but also provides a graph. A graph will provide a better understanding of the company’s financial growth chart.
It is therefore, very crucial that every company achieves the breakeven point at the earliest to avoid loss. They should strive to achieve the breakeven point; by calculating beforehand what is the number (of units) required to sell. Frequently calculate the number of units sold, in order to check where you stand. The result will help you decide the various strategies to use and one can understand if it’s the right business to do or not. Set a certain time frame, to achieve your breakeven point. In case you fail to do, try for another week or two and then decide if you could go ahead with it or not.
Breakeven point also depends on the pricing strategy followed by the company. At times, if there is more demand from the customers to buy your products, profits can be achieved by reducing the selling price. Lesser selling price will attract customers and this will encourage more sales. In this way, breakeven point can be achieved faster.
Breakeven point indicates if you have covered up the investment of your business. It is very important that every company calculates its breakeven point. By calculating one can understand if the money has been recovered, after which his/her earnings turn into profits. So, get your basics right to calculate your breakeven point.