* Break-even Analysis is used by business to help them arrive at a price that will allow them to make some profit, and, know when that will happen in the future. * Basically, a break-even analysis lets you know how many units of stuff you must sell in order to cover your costs. b) How it's done and ....
* You'll need several basic pieces of information:
• Fixed costs per month - like rent and administrative payroll that don't change much from month to month, regardless of how many units you sell • Variable costs per unit - like inventory, shipping and sales commissions that rise or fall with your sales volume. • Average price per unit - Start by looking at your competition, and how they price their products.( Do you want to be at the midpoint, higher end, or lower end ) * *** The Formula - BEQ = Fixed costs / (Average price per unit – average cost per unit) * BEQ stands for break-even quantity a.k.a #of units needed to sell to cover cost * Any sales above that are pure profit. Anything below means you're losing money. If this is the number doesn’t balance then maybe you can change it by increasing your price, or cutting
* An example of how the formula works; **you can explain this to the class if you’d like * Suppose you're turning a jewelry-making hobby into a business. You have $1,000 per month of fixed costs (studio rent, utilities, equipment, etc.). Your variable costs for each necklace are $50 for materials and labor. You'd like to charge $70 per necklace, since that's what similar pieces are selling for.
BEQ = $1000 / ($70 – $50) = $1000 / $20 = 50
That means you'd need to sell 50 necklaces a month at $70 each in order to break even.
Use your break-even formula to compare different pricing strategies. For instance, if you raised the price to $80, you'd only need to sell 33 necklaces—but it might be harder to attract buyers.
On the other hand, if you lowered the...