Break Even Analysis Sample
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In your business planning, have you asked questions like these?
• How much do I have to sell to reach my profit goal?
• How will a change in my fixed costs affect net income?
• How much do sales need to increase to cover a planned increase in advertising costs?
• What price should I charge to cover my costs and allow for a planned amount of profit?
These are some of the questions that you can easily answer by using break-even analysis. In the
next pages, you will learn what break-even analysis is; see examples of how the technique works
in manufacturing, retailing, and service businesses; and find out how you can use it in your own
business planning. Break-even analysis is a very useful tool that can help you understand the
sources of profit in your business.
Break-even analysis is the use of a simple mathematical formula to determine the sales level at
which the business is neither incurring a loss nor making a profit. In other words, when the
firm’s total expenses equal its net sales revenue that is the break-even point for the operation.
Defining the break-even point in mathematical terms is simply the point where:
Total Expenses = Net Sales Revenue
The amount of sales revenue should be readily available on your income as “Net Sales”. Net
sales revenue is all sales revenue (often called gross revenue) less any sales returns and
allowances or sales discounts. If your business is brand new and you have no income statement
yet, you will need to use a projected sales figure. This will work for any of the calculations
outlined in this guide. “Total Expenses” also appears on your income statement (or projections).
You will find most expenses listed under the heading “operating expenses” or “general and
administrative expenses”. Additional expenses to include in your analysis are found on the line
labeled “Cost of Goods Sold” on a retailer’s income statement or “Cost of Goods Manufactured”
on a manufacturer’s income statement.
To use the break-even technique, you need to do further analysis of your expenses. You need to
classify them as either “fixed” or “variable”.
Fixed Costs are those expense items that generally do not change in the short-run regardless of
how much you sell. Fixed costs are typically the expenses that you pay out regularly that do not
go up or down with sales level. Examples of fixed costs include general office expenses, rent,
depreciation, utilities, telephone, property tax, and the like. Obviously all expenses vary over the
long run. For example, rent and property tax increase every year. In break-even analysis though,
our calculations are based on short-run information in order to reveal the current profit structure
of the business.
Variable Costs are those expenses that change with the level of sales. These costs vary with sales
because they are directly involved in making the sale. Examples of variable costs include direct
materials and direct labor in a manufacturing firm; or cost of goods sold, sales commissions, and
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