Forecasting revenue and costs: the break-even point
"I think it will work" is not a business plan, it is a hope. Before renting premises or buying machinery, one very specific question separates viable projects from those that only look viable: how much do you have to sell before you start making money?
Revenue, costs and the break-even point
Explain in your own words what the break-even point is, and what selling above or below it means.
Explain in your own words what the break-even point is, and what selling above or below it means.
A company has a break-even point of 800 units a month. Explain, without doing calculations, what result it will obtain if it sells 650 units, if it sells 800 and if it…
A company has a break-even point of 800 units a month. Explain, without doing calculations, what result it will obtain if it sells 650 units, if it sells 800 and if it sells 1,000, reasoning from the meaning of the break-even point.
The break-even formula
The break-even formula is $q^* = \frac{CF}{p - CV_u}$. Identify what each term represents (CF, p, CV_u) and explain the meaning of the denominator, known as the unit…
The break-even formula is $q^* = \frac{CF}{p - CV_u}$. Identify what each term represents (CF, p, CV_u) and explain the meaning of the denominator, known as the unit contribution margin.
A florist's has fixed costs of $1.500\ \text{€}$ a month, sells each bouquet at $15\ \text{€}$ and it costs her $9\ \text{€}$ to prepare it. a) Calculate the monthly…
A florist's has fixed costs of $1.500\ \text{€}$ a month, sells each bouquet at $15\ \text{€}$ and it costs her $9\ \text{€}$ to prepare it. a) Calculate the monthly break-even point with the formula $q^* = \frac{CF}{p - CV_u}$. b) Explain what happens with the result if she sells exactly that number of bouquets.
Beyond the break-even point: profit and levers
A bakery has a break-even point of 2 000 cakes per year. Analyse three levers to lower it — raising the price, reducing fixed costs, and reducing unit variable cost —…
A bakery has a break-even point of 2 000 cakes per year. Analyse three levers to lower it — raising the price, reducing fixed costs, and reducing unit variable cost — explaining how each one acts on the formula and what risk using it entails.
A backpack factory has fixed costs of $18.000\ \text{€}$ a month, sells each backpack at $45\ \text{€}$ and the variable cost per unit is $25\ \text{€}$. a) Calculate…
A backpack factory has fixed costs of $18.000\ \text{€}$ a month, sells each backpack at $45\ \text{€}$ and the variable cost per unit is $25\ \text{€}$. a) Calculate the monthly break-even point. b) Calculate the month's profit if it sells 1 200 backpacks: $B = (p - CV_u) \cdot q - CF$. c) Explain what each backpack sold above the break-even point contributes to the result.
Decisions using the break-even point: capacity, make or buy
A company needs 8 000 components a year and is undecided between manufacturing them, with fixed costs of $30.000\ \text{€}$ and a variable cost per unit of…
A company needs 8 000 components a year and is undecided between manufacturing them, with fixed costs of $30.000\ \text{€}$ and a variable cost per unit of $2\ \text{€}$, or buying them from a supplier at $6\ \text{€}$ per unit. a) Calculate the annual cost of each option for that volume. b) Calculate at what annual volume both options would cost the same. c) Reason how the company should use that figure to decide between making and buying.
A food stall chain is hesitating between a city centre location (fixed costs of $6.000\ \text{€}$ per month, price $9\ \text{€}$, unit variable cost $4\ \text{€}$, and 1…
A food stall chain is hesitating between a city centre location (fixed costs of $6.000\ \text{€}$ per month, price $9\ \text{€}$, unit variable cost $4\ \text{€}$, and 1 400 expected units) or a neighbourhood location (fixed costs of $2.000\ \text{€}$, same price and variable cost, and 500 expected units). a) Calculate the break-even point and the expected profit of each option. b) Recommend one, also assessing the risk if actual sales fall 20% below expectations.
A company can produce in a craft way (fixed costs of $10.000\ \text{€}$ and a variable cost per unit of $8\ \text{€}$) or in an automated way (fixed costs of…
A company can produce in a craft way (fixed costs of $10.000\ \text{€}$ and a variable cost per unit of $8\ \text{€}$) or in an automated way (fixed costs of $34.000\ \text{€}$ and a variable cost per unit of $4\ \text{€}$), selling in both cases at $10\ \text{€}$ per unit. a) Calculate the break-even point of each technology. b) Calculate the volume above which the automated technology is worthwhile (indifference point between both total costs). c) Recommend a technology if sales of 4 000 units are expected and reason the risk of each option.
Back to the beginning: To know how much you need to sell before opening a business, calculate its break-even point $q^* = CF / (p - CV_u)$: it is the exact sales volume that recovers all the fixed costs and marks the point from which each unit sold generates net profit.