## How to Calculate Break Even Point - Break-even Analysis

4. FORECASTED BREAK-EVEN ANALYSIS

The next analysis to appear in your financial plan is the Forecasted Break-even Analysis. A Break Even Analysis, in its simplest form, is a tool used to determine the level of sales a business must earn in order to achieve neither a profit nor a loss. In other words, the point at which a company's Net Income is ZERO (revenues - expenses = 0).

The break-even analysis focuses mainly on the items included in a company's income statement (IE revenues and expenses). Moreover, the Break-even Analysis relies on your forecasted Fixed Costs, your forecasted Variable Costs and your forecasted Selling Price(s). Forecasted Fixed Costs are costs and expenses that do NOT fluctuate with sales increases or decreases. Forecasted Variable Costs are costs and expenses that DO fluctuate with sales increases or decreases. A Forecasted Selling Price (s) is the price or prices you plan to sell your product at.

Your Forecasted Break-even analysis can consist of one page or two pages; depending upon how much detail you decide to offer. For example, J&B Incorporated's forecasted break-even analysis, presented below, consists of two parts. PART A provides the reader with all information required in making the break-even calculation.  PART B shows the actual break-even calculation.

 J&B INCORPORATEDFORECASTED BREAK-EVEN ANALYSISFOR YEARS... REQUIRED INFORMATION: CONTRIBUTION MARGIN: YEAR 1 YEAR 2 YEAR 3 Selling Price per unit (note 1) \$73.89 \$68.01 \$67.61 Weighted Average Variable Cost per unit \$16.50 \$14.79 \$12.10 CONTRIBUTION MARGIN PER UNIT \$57.39 \$53.22 \$55.51 FIXED COSTS PER YEAR: Advertising Expense (note 3) \$130,000 \$150,000 \$170,000 Wages & Employee Benefits (note 4) \$122,366 \$136,153 \$167,421 Casual Labor (note 5) \$ 2,400 \$ 3,000 \$ 3,600 Office Supplies (note 6) \$ 1,500 \$ 1,715 \$ 1,908 Rent Expense (note 7) \$ 12,000 \$ 12,600 \$ 13,230 Telephone/Fax Expense (note 8) \$ 3,600 \$ 3,840 \$ 4,080 Professional Services (note 9) \$ 7,000 \$ 3,500 \$ 4,000 Insurance Expenses (note 10) \$ 1,500 \$ 1,650 \$ 1,815 Toll-free Charges above Variable Cost (note 11) \$ 15,685 \$ 20,706 \$ 25,408 Bad Debt Expense (note 12) \$ 5,824 \$ 6,738 \$ 7,844 Interest on Operating Loan (note 13) \$ 2,000 \$ nil \$ nil Internet Storage & Accounts Expense (note 14) \$ 2,550 \$ 2,700 \$ 2,865 Miscellaneous Expenses (note 15) \$ 2,400 \$ 2,600 \$ 2,800 Depreciation Expense - Equipment (note 16) \$ 3,142 \$ 4,392 \$ 6,392 Depreciation Expense- Furniture (note 17) \$ 606 \$ 906 \$ 1,306 Amortization of Initial Development Costs (note 18) \$ 15,924 \$ 15,924 \$ 15,924 Amortization of Future Development Costs (note 19) \$ 24,720 \$ 55,215 \$ 86,575 TOTAL OPERATING/FIXED COSTS \$353,218 \$421,638 \$515,168 Note: all J&B's Operating Expenses are considered to Fixed Costs!

 J&B INCORPORATEDBREAK-EVEN CALCULATION (IN UNITS)FOR YEARS 1, 2, 3 Year 1 Year 2 Year 3 Fixed Costs divided by Contribution Margin (Break-even) = 6,155 units 7,923 units 9,281 units Forecasted Sales in units per year = 7,882 units 9,907 units 11,602 units Forecasted Sales above Break-even = 1,727 units 1,984 units 2,321 units J&B is forecasting sales of 1,727 units above its break-even point in year one, 1,984 units above break-even in year two and 2,321 units above break-even in year three.

In the above example, notice that J&B calculates its break-even point and provides an indication of how many units it plans to sell above its break-even point. To do this, J&B simply subtracts each years' forecasted break-even point from the number of units it plans to sell in each forecasted year.

Also notice:  J&B provides readers with all figures needed to calculate the break-even point. You may elect to use this format or you may decide to only provide the break-even calculations. Whichever format you decide, be sure your break-even point is calculated over a three year period - one column for each forecasted year. You may also decide to provide the reader with an explanation on why your forecasted break-even point is increasing or decreasing. For example, J&B's break-even point is increasing due to the company's planned decrease in its selling price, its estimated increase in variable costs, and its planned increase in fixed costs. As a result, the company is earning a lower contribution margin on each sale made during year two and three. Thus less "money" is contributing to their higher fixed costs.

This concludes our discussion on how your projected break-even analysis should appear in your Financial Plan. Remember, it is imperative to understand the theory behind the break-even analysis before attempting to forecast your own. To learn more about this financial analysis, please refer to the section entitled "The Break-even Analysis". When you understand the theory behind each financial statement and analysis, you will be equipped with the necessary tools needed Forecast Your Own Forecasted Financial Statements.

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