## Break-even Point for a Single Product

Break-even Point for a Single Product.

In the above readings, we have provided simple examples dealing with the break-even point for a company selling only one product. The example that follows will again discuss the break-even point for a single product. Here goes!!!

Assume Bob Jones owns and operates a computer company called "Computers Are US". The company has been in business for 10 years and sells only one type of computer. Bob buys the computers from a wholesaler in Washington and sells them at retail to consumers all across the country. Each computer costs \$1,500 (including shipping costs). The company sells each computer for \$2,000.

Bob forecasted the following operating expenses for his upcoming business year. Assume all operating expenses are considered fixed costs.

 OPERATING EXPENSES: Marketing Expenses: Advertising Expenses \$10,000 Sales force Commission Expenses \$15,000 Total Marketing Expenses \$25,000 Administrative Expenses: Utility Expenses \$ 1,000 Insurance Expenses \$ 500 Office supplies Expense \$ 1,000 Wages Expense \$22,500 Rent Expense \$12,000 Depreciation Expenses \$ 2,000 Bank Service Charges Expense \$ 1,000 Total Administrative Expenses \$40,000 Total Operating Expenses \$65,000

Now we have all the information needed to determine the break-even point for Bob's computer company:

 Total Fixed Costs \$65,000 Selling Price per Computer \$2,000 Variable Cost per Computer \$1,500

Break-even in units (computers)

=                  Fixed Costs
Contribution Margin

=                       \$65,000
\$2,000 - \$1,500

=                       \$65,000
\$ 500

=   130 units(computers) must be sold in order to break-even or have a net income of \$0.00

Therefore, Bob's computer company would have to sell 130 computers in order to achieve a net income before taxes of ZERO.

Now suppose that Bob wanted to know how many units he would have to sell in order to achieve a Net Income Before Tax of \$45,000. To make this calculation, Bob would simply add the desired Net Income Before Tax (\$45,000) to his Forecasted Fixed Costs (\$65,000) and divide by his expected Contribution Margin (selling price per unit - variable cost per unit). Here's the formula;

Break-even at a desired income level  =

=               Fixed Costs + Desired Net Income before taxes
Contribution Margin per computer

=                                   \$65,000 + \$45,000
\$ 500

=                                           \$110,000
\$ 500

=                                        220 Computers

Therefore, Bob must sell 220 computers in order to achieve a net income before taxes of \$45,000. Furthermore, Bob could use the break-even formula to determine how many computers he would have to sell in order to achieve any level of earnings before taxes. For instance, lets assume Bob wants to know how many computers he would have to sell in order to achieve a net income before taxes of \$85,000. Once again, he would simple add his forecasted annual fixed costs (\$65,000) to his desired level of earnings for the business year (\$85,000) and divide by the contribution margin (selling price per computer of \$2,000 minus (-) the variable costs per computer of \$1,500).

Break-even at a desired income level

=                Fixed Costs + Desired Net Income before taxes
Contribution Margin

=                                   \$65,000 + \$85,000
\$ 500

=                                           \$150,000
\$ 500

=                                         300 COMPUTERS

Assuming Bob buys each computer for \$1,500, sells each computer for \$2,000 and has fixed costs of \$65,000 during the business year, he would need to sell 300 computers in order to achieve a Net Income Before Taxes of \$85,000 for the business year.

As you can see, the Break-even formula is certainly a powerful tool that can tell a business owner a great deal. This concludes the break-even analysis for a company selling a single product. The next issue we will discuss is "determining a break-even point for businesses selling more than one product".

Categories: Financial