![]() The margin of safety is based on what you need to earn in revenue collected to offset associated costs. Break-even analysis will help you in preparing your business plan.The break-even analysis calculates the margin of safety for your business. People look at your business plan before investing their money into your business. Fund your businessīreak-even sales help you in acquiring funds for your business. Knowing how much you should earn so that your business doesn’t go downhill will help you in making smart decisions. While running a business, you are required to make essential decisions from time to time. In this way, you can determine the price of your products in such a way that it is neither too high that your people choose your competitors’ products over your products and nor too low that you will not be able to stay profitable. Calculation of break-even sales helps you in determining the accurate cost of your product. Decide selling price of your productsĬhoosing the selling price of your product is very important for a business. In this way, you can determine your sales target accurately. Once you calculate break-even sales, then you can choose how much revenue you need to generate to stay profitable. For example, the company is required to pay salaries of the employees, rent of the building, and taxes, etc.Īlso Read Tactical Marketing: Definition, Importance, and Difference 2. The fixed expenses are periodic and will occur irrespective of the volume of the output. In the next step, calculate the fixed cost of production. ![]() ![]() The variable costs are all those costs that vary with the change in the volume of production-for example, the cost of raw material, labor, and the packaging. Calculate the variable cost of production of the company for which you want to calculate the break-even sales. Let us learn how to break-even sales can be calculated step by step using the formula. Therefore, the company is required to generate revenue of $1,428,571 in order to cover both variable as well as fixed costs. The break-even sales for the company can be calculated using the formula of break-even sales.īreak-even sales = $500,000 * $ 20,00,000 / ( $ 20,00,000 – $1, 300, 000 ) The total fixed cost incurred in the production of a certain number of soft toys in the last financial year was $500,000, whereas the variable cost incurred was $1,300,000 on the total sales revenue of $20,00,000 generated by the company. Let us take an example of a company that produces soft toys. A company that has low fixed and variable expenses will reach the break-even sales point quickly as compared to the companies with high fixed and variable cost of production. Break-even sales are calculated by businesses to study the relationship between fixed cost, variable cost, and revenue generated by sales of the products. In simple words, we can say that break-even sales are a point in sales where a company is neither generating profits nor incurring any losses. Decide selling price of your productsīreak-even sale is a point in sales where companies recover both fixed and variable costs like the cost of supplies, rent of the building & machines, cost of advertising, and salaries & wages of employees. Benefits of calculating Break-Even sales.Examples of calculation of break-even sales.How to Calculate Break-even Sales? Formula.
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