Break-Even Analysis

A significant advantage of some business ideas is that the venture can break even at what seems to be an easily achievable volume. A technique for quantifying that volume, called break-even analysis, examines the interaction among fixed costs, variable costs, prices, and unit volume to determine that combination of elements in which revenues and total costs are equal.

Fixed costs are those expenses necessary to keep the business open, and are not impacted by sales volume. They will include such things as rent, basic telephone expenses and utilities, wages for core employees, loan or lease payments, and other necessary expenditures. An entrepreneur should also include a living wage for himself/herself as a fixed cost.

Variable costs include those expenses that change as a result of sales volume. This can be a relatively simple relationship, as in cost of goods sold, where for example the variable cost of baked goods sold at a coffee shop is what we pay the baker for them, $0.30 each. Variable costs can also be very complex; for example, higher sales in one area of our business may increase long distance charges. Labor costs may be fixed for full-time employees, then, as sales increase, some overtime is incurred until additional personnel can be justified.

Generally, an initial break-even analysis focuses on a relatively narrow range of sales volume in which variable costs are simple to calculate. The variable cost in a coffee shop is simply the cost of goods sold. For a pizza delivery operation, it might be the cost of ingredients, and some cost allocated for operation of the delivery vehicle. A general term often used for the difference between selling price and variable cost is "contribution margin," or the amount that the unit sale contributes to the margin available to pay fixed costs, and generate profit (we hope).

Now let's take a look at how break-even analysis can be helpful to us. For this example, let's assume we have determined that the level of fixed costs (salaries, rent, utilities) necessary to run a coffee shop on a monthly basis is $9,000. In addition, a cup of coffee that we sell for $1 costs us $0.25 for the bulk coffee, filters, and water.

The contribution margin of a cup of coffee is, therefore, $0.75. We can now calculate how many cups of coffee we have to sell to cover our fixed costs:

Break-Even = (Fixed Costs) / (Contribution Margin)

= $9,000/$0.75 = 12,000 cups of coffee per month

Let us say, further, that the fixed cost estimate was based on being open 6 days a week, 8 hours a day. This converts roughly to 200 hours a month, so we have to sell 60 cups an hour. This is a cup a minute for every minute we are open.

Does this seem feasible? Let us assume not, and evaluate some options.

(1) Cut expenses

Remember that we are still in the planning stage here, and experience has shown that prospective entrepreneurs almost always underestimate expenses. Let's pass on this approach.

(2) Raise prices

We could plan on charging $1.25 per cup from the beginning, for a contribution margin of $1 per cup. The arithmetic is easy; to cover $9,000 in fixed expenses we need to sell 9,000 cups of coffee per month. The most important factor here is what the competition is charging.

(3) Broaden our product line

For the sake of clarity in demonstrating relationships between price, cost, and sales volume, we have considered a simplified version of how a real coffee shop might operate. The market severely constrains the amount we can charge for an ordinary cup of coffee, and a one product shop would have limited appeal. Perhaps we could also offer gourmet coffees, which cost us $0.50 per cup to brew, at $2.00 per cup. We could also offer baked goods, which cost us $0.30 each, at $1.30.

Suffice it to say that the break-even calculation now becomes a bit more complex, and outside what we are trying to accomplish here. Feel free to try it on your own.

This has been a very brief overview of how break-even analysis can be used in helping the entrepreneur better understand the relationship of the financial factors involved in measuring the feasibility of a proposed venture. From a preliminary analysis of selling prices that the market will bear, prevailing costs, and reasonable expectations of sales volumes, the entrepreneur can avoid making serious mistakes and may discover significant opportunities.

john b. vinturella, ph.d. has almost 40 years experience as a management and strategic consultant, entrepreneur, author, and college professor. For 20 of those years, Dr. Vinturella was owner/president of a distribution company that he founded. He is a principal in business opportunity sites john b. vinturella, ph.d. and john b. vinturella, ph.d., and maintains business and political blogs.

no-contract cleaning service Mundelein ..

In The News:

Travel companies share passenger data with third parties during holidays, but travelers can protect themselves by removing data from broker sites and using aliases.

Xpeng's humanoid robot moves so realistically that crowds believed it was fake, marking a major advancement in robotics technology ahead of 2026 commercial launch.

Researchers discover phishing scam using invisible characters to evade email security, with protection tips including password managers and two-factor authentication.

iPhone and Android users can reduce battery drain and data usage by restricting Background App Refresh to Wi-Fi connections instead of mobile networks.

Scammers nearly stole an Apple account by exploiting the support system with authentic-looking tickets and phone calls, users can protect themselves with safety steps.

FoloToy restored sales of its AI teddy bear Kumma after a weeklong suspension following safety group findings of risky and inappropriate responses to children.

Threat intelligence firm Synthient uncovers one of the largest password exposures ever, prompting immediate security recommendations.

Viral video shared by Elon Musk shows Tesla's Optimus humanoid robots performing tasks from cooking to construction, garnering over 58.5 million views on social media.

Chinese hackers used Anthropic's Claude AI to launch autonomous cyberattacks on 30 organizations worldwide, marking a major shift in cybersecurity threats.

Apple's new Sleep Score feature gives you a rating for your nightly rest quality. Learn how to set it up on your Apple Watch and iPhone today.

Essential phone settings to enable before losing your device, including Find My network, location services and security features for iPhone and Android.

The Fox News AI Newsletter gives readers the latest AI technology advancements, covering the challenges and opportunities AI presents.

Cybersecurity research shows weak passwords remain a major threat, with simple patterns and number sequences putting millions of accounts at risk.

New Android malware BankBot YNRK silences phones, steals banking data and drains crypto wallets automatically. Learn how this advanced threat works.

FDA approves first human trial for Paradromics' brain-computer interface that could restore speech for paralyzed patients through neural technology.

New phishing platform QRR targets Microsoft 365 users across 1,000 domains in 90 countries. Learn how to spot fake login pages and protect your accounts.

OpenTable now uses AI to track your dining habits and share insights with restaurants. Learn what data they collect and how to protect your privacy.

Google's discontinued Nest thermostats still secretly upload home data to company servers despite losing smart features, raising serious privacy concerns.

New Android malware NGate steals NFC payment codes in real-time, allowing criminals to withdraw cash from ATMs without your card. Learn protection tips.

DoorDash confirms data breach exposing customer names, emails, addresses after social engineering attack. Learn how to protect yourself from scams.

Concerned about Google's AI scanning your Gmail? Learn how to disable Gemini features that access your emails, Drive files and Chat messages for privacy.

Google warns Android users about dangerous fake VPN apps hiding malware that steals passwords, banking details and personal data from phones and tablets.

Apple's digital passport feature lets iPhone users breeze through TSA checkpoints this holiday season using Digital ID technology at 250+ airports.

A new phishing scam targets family photos with fake "Cloud Storage Full" alerts. Criminals steal credit card information through fake sites. Learn protection tips.

South Korean scientists create ultra-thin fabric muscles that turn clothes into robotic assistants, lifting 33 pounds while weighing under half an ounce.

Break-Even Analysis

Strategic Planning