When running a business is important to know what is your break even point so you can set the target on sales correctly. In every business, there are fixed and variables costs, break even point is the level where the revenue equals the total cost, that means that you do not make or lose money. There are various methods to calculate this point but let's see an example of the one that covers multiple products.
First, we have to know the price of each product and the variable cost so we can calculate the contribution margin of each unit. Let's say that we offer three major products and the percentage of sales that we expect from each is one
Product 1: 20 %
Product 2: 50 %
Product 3: 30 %
|Product 1||Product 2||Product 3|
|price per Unit||17 $||34 $||50 $|
|- variable cost per unit||2 $||4 $||6 $|
|= contribution margin per unit||15 $||30 $||44 $|
|x sales mix percentage||20%||50%||30%|
Weighted Average Contribution Margin = 31.2 $
Total fixed costs include bills like office rent, utilities bills, in general, all the costs that will have to be paid even the business has no revenue. Let's take a rough estimate of 3000 $.
Break Even Point = Fixed Costs / Weighted Average Contribution Margin
we have to sell approximately 96 unit in total or 19 units from product 1, 40 units from product 2 and from product 3 29 units
Now we know approximately the number form each unit that we have to sell so not to have any loses.
In business level also we have to take into consideration special tax laws that apply in the country that the business has his base. For example, in case of Greece, we have designed a special business calculator to find the break even point and how you be taxed as a freelance or as a sole proprietorship business.
When writing or updating a business plan for a business is important to calculate break even point on single or multiple products.