How to prepare
a Break Even Analysis
for your business
Michael Chase, MBA, MS Taxation
www.MChase.com
Accounting@MChase.com
Copyright 2010
Michael Chase.
All rights reserved.
Michael
Chase
Break Even Analysis
A break even analysis is a way to figure out how much your business has to sell –
both in dollars and in units – to make money.
A business makes money when its sales are higher than break even sales.
You need to know two things to figure out your business's break even sales:
„
Its markup
„
Its fixed costs
The example on the next page shows the break even sales, in dollars and units, of a
retail business that sells widgets.
This is a simplified example because this business only has one kind of widget that it
sells for $15 each.
To apply this to a business that sells many different items at many different prices
you need to figure out:
„
The average selling price of each item at each price point
„
The average markup of each item at each price point
„
The percent of total sales of each item at each price point
Then aggregate the sales of each item at each price point.
This is actually easier than it sounds because you can simplify the calculation by
aggregating different items that are in about the same price range and have about
the same markup.
continued …
Break Even Analysis Example
Product: Widgets
Cost
$10
Markup
$5
Sell for
$15
Monthly Fixed Costs
Entrepreneur
Assistant
$2,500
1,250
Total payroll
3,750
Payroll taxes (10%)
Rent & Utilities
Phone & Internet
375
1,000
250
Total Monthly Fixed Costs
$5,375
Break Even Sales
Units
Unit Break Even Sales =
(Total Monthly Fixed Costs) divided by (Markup)
1,075
$5,375 / $5 =
Dollars
Dollar Break Even Sales =
(Unit Break Even Sales) times (Sell for)
1,075 x $15 =
$16,125