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, utility 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 as not to have any loses.
At the 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 the case of Greece, we have designed a special business calculator on how is breakeven point is calucated including to find profit margins, taxes and social insurance as a freelance or as a sole proprietorship business.
Finding the breakeven points and profits margin is important to any business, but also do not forget the power of compound interest so check our investment calculator return.