Know your break-even point
This Break-even point Info-Guide explains what break-even point is and why it pays to know your break-even point.
Break-even point is the level of sales at which you are making neither a profit nor a loss. If sales are achieved above this point, you are making a profit; below this point you are making a loss.
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Fixed costs
To be open for business, you must incur certain fixed costs, regardless of the level of business you do.
Payroll costs
Direct costs of sales
Additional staff costs
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Sales, less direct costs of sales, provide a contribution towards paying overheads and fixed payroll. Once overheads and fixed payroll are covered, any remainder is your profit. If this contribution cannot cover overheads and fixed payroll, you make a loss.
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Use this Break-even point formula to find out at what level of sales you are making neither a profit nor a loss:
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Background
- Fáilte Boat Hire own 20 boats which are available to customers for six months in the year.
- The average price charged is €80, excluding VAT, or €90, including VAT.
- The business achieves 75% usage of its boats over the year.
A year’s trading picture would look like this:
| Fáilte Boat Hire - Profit and Loss Account |
| Number of boat-days sold |
2,800 |
20 boats x 6 months x 75% usage
|
| Average price, excluding VAT |
€80 |
|
| |
€ |
|
| Sales (excl VAT) |
€224,000 |
Boat-days x average price
|
| Less - Direct costs: |
| Staff / other costs |
€60,000 |
Approx €21.50 per boat-day sold
|
| Fuel and other supplies |
€52,000 |
Seasonal staff pay and overtime - approx €18.50 per boat day
|
| Contribution towards fixed costs and profit |
€112,000 |
Contribution = 50% of sales
|
| Less Fixed costs: |
| Staff costs (full-time) |
€60,000 |
Pay cost of core staff
|
| Overheads |
€25,000 |
Insurance, rates, advertising, electricity and heating, repairs, bank interest
|
| Profit |
€27,000 |
|
| |
Using the Break-even formula, the break-even point is calculated as follows:
What sales value do Fáilte Boat Hire need to achieve in order to avoid making a loss?
Fáilte Boat Hire need to achieve €170,000 in sales value in order to avoid making a loss, or 2,125 boat-days sold in the period. This is based on each customer paying €80, excluding VAT, or €90, including VAT.
How far can sales drop before Fáilte Boat Hire start to make a loss?
Fáilte Boat Hire are aiming for a sales target of €224,000 but during a recession it is likely that the business will not reach this sales target. The owners need to know how far sales can drop before the business starts to make a loss. By calculating their break-even point, they know that when sales fall below €170,000, they are not covering all their costs and are making a loss.
Margin of safety
Fáilte Boat Hire therefore have a margin of safety of €54,000 in sales value (€224,000 minus €170,000) before this critical point is reached.
What level of sales do Fáilte Boat Hire need to achieve in order to earn a target profit?
Use this formula to find out what level of sales needs to be achieved in order to earn a target profit:
If Fáilte Boat Hire aim to earn a profit of €50,000, the required sales level is:
Fáilte Boat Hire must aim to sell 3,375 boat-days sales in the period - based on each customer paying €80, excluding VAT, or €90, including VAT - in order to achieve the target profit of €50,000.
Calculate your break-even point
Use our Quick Break-even Point Calculator to calculate your own break-even point, or the sales level required to achieve a target profit.
Experiment with this calculator to determine the impact of changes in the following on your sales break-even point:
- Sales volumes (ie in customer numbers)
- Selling prices
- Direct / variable costs and fixed costs.
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