The break-even point is normally used with manufacturing to determine if it is reasonable to begin or continue manufacturing a particular product but it can also be used with service industries to help determine if your business is viable.
The normal way to calculate the break-even point of a product is with this formula.
Cash Break-even point = (fixed costs – depreciation) / contribution margin per unit
Fixed costs are those things that you will have to pay for even if you don’t sell one unit – this includes expenses such as rent and utilities. The contribution margin is the amount you sell the product for minus the amount it costs to make that product.
For example if you have a fixed cost of 40,000 with depreciation of $2,000 and you plan on selling your product for $40 each with a production cost of $10 then you would need to sell 1267 units to break even. This would not be a problem if you expect to sell more than 1267 units in one year but if your market studies show it only has a potential of 1000 units per year you may want to re-think the production or find a way to lower the cost, increase the sell price or reduce the fixed costs.
This works the same with service industries expect the contribution margin is based on the sell price of the service minus the cost to generate that service. So if we modify the example above so the service you are going to provide is $700 and it costs you $300 to follow through with that service then you would need 95 clients to break even.
Keep in mind that sometimes the fixed costs are covered by an existing product or service so you also must take into consideration other products or services offered. We can help you analyze if a particular product or service will contribute to your bottom line. Give us a call to schedule an appointment.