Have you ever wanted to know what your business needs to sell in order to make a profit? Are you curious if you’re selling enough product to cover your long-term costs? Using a little information you already have on hand, you can easily find out. Doing some simple math, you can figure out how many items you need to sell in order to break even and eventually make a profit.
Let’s say you sell bouquets for $30. It costs you $5 of materials and labor – all variable costs – to put the bouquet together. Your total fixed costs is $50,000. There is a two step process to calculate your break-even point in units. First, subtract your variable costs from your selling price to find your contribution margin per unit. In this example, your contribution margin per unit is $30 – $5, or $25 per unit. Second, divide your total fixed costs by your contribution margin per unit. By dividing $50,000 by $25 per unit, you arrive at your break-even point in units of 2,000. If you sell 2,000 bouquets, you break even. If you sell 1,999 bouquets, your business loses money. If you sell 2,001 bouquets, your business makes money.
If you sell goods, this information is really important for your small business. Your break-even point indicates when you’ll start making a profit. If you can’t reach this level of sales, you’ll lose money. If you know you can’t sell 2,000 bouquets, your company will have difficulty sustaining itself over the long run without additional investments. Before starting a new company or introducing a new product, think about the costs that go into producing the goods. By calculating the contribution margin and break-even point in units, you can figure out if your idea is a good one.