WHEN CAN YOU BREAK EVEN?
Some producers spend time worrying about the prices they charge without ever learning the prices they have to charge to break even.
Their own business records, plus a little arithmetic, can reveal their break-even point. To learn how many units of a product must be sold at a given price to cover costs, first determine the monthly fixed costs - expenses, such as rent, that must be met regardless of production levels.
Then add up variable costs, which rise and fall in step with output, stating these in terms of units produced. Subtract the variable per-unit costs from the price at which each unit sells; this gives a 'contribution margin.' Divide the fixed costs by the per-unit contribution margin, and you have the number of products in the line that must be sold each month to break even.
For example:
Fixed costs: $5,000 per month.
Variable costs: $1 per unit of output.
Sales price: $6 per unit.
Contribution margin: ($6 - $1) = $5 per unit.
Break-even point: ($5,000 divided by $5) =1,000 units of production per month.
By plotting the break-even point at various cost levels on a graph curve, one can interpolate the volume needed to break even at any price or cost level. Or, working the other way around, it's possible to find the production level needed to exceed the break-even point by a desired amount.