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.

taxi from O'Hare Bismarck .. Lockport Chicago limo O’Hare

In The News:

The EO Canopy is a self-sustaining, solar-powered camping platform designed to provide all the comforts of home while completely off the grid.

Experts say hackers who used to focus on Windows operating systems are increasingly targeting Apple IDs as part of a new phishing campaign.

Unitree, a Chinese robotics company that developed a backflipping robot, has now introduced a humanoid robot capable of doing a side flip.

Stay up to date on the latest AI technology advancements and learn about the challenges and opportunities AI presents now and for the future.

According to the FBI, cybercriminals are sending extortion letters, threatening to release victims' sensitive information unless a ransom is paid.

FireSat is a satellite project designed to detect and track wildfires early, aiming to detect a fire that's the size of a classroom within 20 minutes.

Tech expert Kurt “CyberGuy" Knutsson reports that researchers have uncovered a Chrome vulnerability used in a cyber espionage campaign.

Preserving voicemails securely on Android: Tech expert Kurt “CyberGuy" Knutsson reveals easy methods to keep memories alive forever.

This phishing kit bypasses 2FA via session hijacking and real-time credential theft. Kurt “CyberGuy" Knutsson offers four ways to stay safe from Astaroth phishing attacks.

Tech expert Kurt “CyberGuy" Knutsson discusses Joby Aviation and Virgin Atlantic planning to launch 200-mph U.K. air taxis linking airports and cities.

Fake Apple virus warnings, security alerts and messages are tactics used to prompt you to call a number or click on a malicious link. The CyberGuy explains how to protect your devices.

The combination of artificial intelligence and neuroscience allows a paralyzed man to manipulate a robotic arm by using his brain to imagine movements.

With the help of artificial intelligence, sophisticated fraud techniques emerging today are virtually undetectable to the untrained eye.

Stay up to date on the latest AI technology advancements and learn about the challenges and opportunities AI presents

If you need to free up space on your Mac, consider deleting duplicate photos in your image library. Apple makes it easy to do, and the CyberGuy explains the process.

Microsoft is discontinuing Skype in May after 22 years of service. Kurt the CyberGuy addresses other options for internet-based phone and video service.

Tron 1, a Chinese company's two-legged robot, is versatile and can walk, roll and pivot, even on rough terrain. Tron 1 stands 33 inches tall and weighs 44 pounds.

Hackers are tricking people into installing password-stealing malware by making them press keyboard shortcuts under the pretense of proving they're not bots.

Saving the voices of loved ones can be a comforting way to keep alive memories. Kurt "the CyberGuy" Knutsson explains how to preserve voicemail messages.

Stay up to date on the latest AI technology advancements and learn about the challenges and opportunities AI presents now and for the future.

The FBI warns that some free online document converters load malware onto people's computers, making their private information vulnerable to attack.

Toyota's compact electric FT-Me is designed to tackle challenges of city living while offering an accessible and eco-friendly transportation solution.

Kurt “CyberGuy" Knutsson says 23andMe's bankruptcy raises data privacy fears: Opt out, download and delete data now.

UBTech and Zeekr unite with AI robot swarms to make car manufacturing faster and smarter. Tech expert Kurt “CyberGuy" Knutsson explains how the process works.

Tech expert Kurt “CyberGuy" Knutsson says Apple's Passwords app had a three-month phishing flaw from iOS 18 to 18.2 patch.

Break-Even Analysis

Strategic Planning