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Working out your break-even point |
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Break-even is the level of sales you need to cover all of your costs (both fixed and variable). Let’s see how to work it out using an imaginary manufacturer:
FORECAST over the next 12 months: | | Sales | 108,000 | | Opening Stock | 38,000 | | Plus purchases | 60,000 | | Less Closing Stock | (50,000) | | Goods or materials used | 48,000 | | Wages or salaries | 32,000 | | Fixed costs | 10,360 |
From these figures you can work out your projected gross and net profit. That is to say, your profits before (gross) and after (net) you allow for your fixed costs.
| | Sales | 108,000 | | Goods or materials used | (48,000) | | Wages or salaries | (32,000) | | Less variable costs | (80,000) | | Gross Profit (profit before fixed costs) | 28,000 | | Less fixed costs | 10,360 | | Net Profit | 17,640 |
Gross profit margin | This is your profit before allowing for fixed costs. It is written as a percentage of sales. | | Gross Profit x100/Sales = 28,000 x100 / 108,000 = 25.9% |
| Break –even turnover Fixed costs x 100 / Gross Profit Margin = 10,360 x 100/ 25.9 = $40,000 Therefore the business will need a turnover of $40,000 to cover all fixed costs, as long as it keeps the same gross profit margin. |
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