How to write a Break Even Analysis

Break Even Analysis

Break even (B/E) analysis is a simple, but very effective financial feasibility test.  B/E is used to find

the amount of sales necessary to pay all fixed costs (and have zero income.)  In your business plan, it

represents a minimum acceptable performance.  Follow these steps to calculate:

1) Determine Contribution Margin Percent.  Contribution Margin (CM) equals Sales minus

Variable Expenses.  CM% equals CM dollars divided by Sales.  Note: The biggest variable

expense is usually Cost of Goods Sold (CGS), which is the direct material and labor necessary

to make a product or service ready for sale.

2) List and total all Fixed Expenses for a specific time period (usually one month.)  Fixed

expenses do not rise or fall with sales volume.  Examples: rent, insurance, utilities, etc.

3) Break Even Sales is Fixed Expenses divided by Contribution Margin %.  (See Example)

Example:

Unit sales price:   $10                    Monthly Fixed Expenses:

Rent  2,000

less Cost of Goods Sold:               Utilities 1,000

Material & Labor    3                     Salary 3,000

less Other Variable Exp:              Other  4,000

Commissions      1

Total Fixed Exp.    $10,000

Unit Contribution Margin = $6

($10 – $3 – $1)

CM % ($6 ÷ $10) =  60%

B/E = Fixed Expense ÷ CM %

B/E = $10,000 ÷ .6

Monthly B/E Sales = $16,667

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