Break-even Point for Businesses Selling Multiple ProductsRecall The Cigar Company sold only Cuban Cigars, The XYZ Company sold only one type of calculator, and the 'Computers Are Us company sold only one type of computer. All of the examples we examined thus far had one thing in common; they all sold only one type of product having a single selling price and a single variable cost.
Most businesses, however, sell multiple (many) products, each having their own selling price and product cost (or variable cost). How can these businesses calculate a break-even point, when the formula allows for only one selling price and one variable cost? Below discusses how simple the process is.Businesses selling multiple products must reduce all the selling prices down to one selling price. Similarly, businesses selling multiple products must reduce all the product costs (variable costs) for each product down to one product cost (variable cost). This is accomplished by calculating a weighted average selling price and a weighted average product cost (variable cost). Further, when the weighted average selling price and weighted average variable cost are calculated, only then can a business, selling multiple products, determine their break-even point. Moreover, businesses selling multiple products will determine their break-even point using the following Break Even formula:Break Even in Units = Fixed CostsWA Selling Price - WA Variable CostsAs you can see, the break-even point formula for businesses selling multiple products is similar to the formula used by businesses selling a single product.
The only difference is the term 'weighted average' placed in front of the selling price and variable cost.
Single product break evenUnitTotalUnits750Revenue10.007,500Cost of sales4.003,000Contribution margin6.004,500Operating expenses4,500Net income0However, most businesses sell more than one product, and the calculation of the break even units needs to be amended to reflect this. Break Even Analysis for Multiple ProductsIn order to carry out a break even analysis for multiple product lines. Suppose for example, our business has the same operating expenses of 4,500, but this time is has two product lines. Product A is our low margin product with a selling price of 5.00 and a cost price of 4.00, and product B is our high margin product with a selling price of 20.00 and a cost price of 7.00.
In addition, our financial projections show that our unit sales mix is 90% / 10%, meaning that 90% of our unit sales will be product A, and 10% will be product B.The break even analysis for multiple products is carried out using the following steps: Step 1: Calculate the Weighted Average Contribution MarginIn the single product example we used the contribution margin of the product to work out the break even units. Break Even Analysis For Multiple ProductsUnit AAUnit BBTotalUnits1,Revenue5.009,21020.004,10013,310Cost of sales4.007,3687.001,4358,803Contribution margin1.001,84213.002,6654,507Operating expenses4,500Net income7The business breaks even when it sells 1,842 units of product A, and 205 units of product B. The small net income of 7 is due to rounding up to the nearest unit during the calculations. Multi Product Break Even AnalysisWhile this example uses a two product business, the calculations can be carried out for any number of products, the only change to the calculation is in step 1, where the weighted average contribution margin is calculated.So for example, if the business had five products with contribution margins and sales mix percentages as follows. Multiple Products Margin Mix ProductMarginMix%A2.2030%B4.9010%C13.0025%D22.0015%E16.0020%The weighted average contribution margin is then calculated using the sales mix formulaas:WACM = Product A contribution x Product A sales mix% + Product B contribution x Product B sales mix%.WACM = 2.20 x 30% + 4.90 x 10% + 13.00 x 25% + 22.00 x 15% + 16.00 x 20%WACM = 10.90The weighted average contribution margin can now be used as before in steps 2 and 3 above.It should be noted that this method of break even analysis for multiple products only works when the product sales mix remains constant. When preparing an estimate of the sales mix will be used and a break even position can be calculated.
Sample Break Even Analysis Spreadsh…
Eso pet health bar addon. If as time passes the actual results reveal a different sales mix, then the financial projections would be revised and a new break even position must be determined using a revised sales mix calculation.
The actual calculations required to perform a break-even analysis are relatively simple. The calculations however are the easy part, determining your optimum sales unit price and accompanying variable costs can be much more difficult. Even fixed costs can be less than straightforward, as you may, for example, find yourself with a choice of premises with different rates of rent. While a break-even calculator cannot make these decisions for you, it can make the decision making process significantly easier for you as a business owner, by enabling you to easily look at different scenarios for break-even. Our Break Even Calculator will help you run the reports and analysis you need for your business. SupportVisitBonus Downloads Bonus #1 Break-Even Point Calculator for Multiple ProductsThis version of Break-Even calculator allows to calculate break-even units and break-even price and break-even period for multiple products using additional Sales Forecast feature. This feature helps to define the proportion of the product in the total sale as a constant over the period of time.Using Break Even CalculatorThere are a number of ways in which break-even can be viewed.
While they essentially all use the same information to perform a calculation, there are differences between them, and you may favour one method over the others. Our break-even calculator allows you to work out your break-even number of units, break-even price and break-even payback period. The information you enter can be easily changed, allowing you to easily look at factors such as the impact of a small increase in cost or sale price.The break-even number of units is the number of units that you would have to sell in order to break-even, or put another way, the point at which your investment will start to make a positive return.The break-even price is the dollar amount of sales you would have to make in order to cover your costs, i.e. The point at which your total revenue equals your total costs.The break-even payback period is the amount of time it will take you to break-even.Our break-even calculator also allows you to calculate a net income before taxes (NIBT) using the monthly number of units sold. This will enable you to see how your business will perform over a period of time, allowing you to plan for the future. Break Even ChartA breakeven chart is a useful way of displaying your total revenue, total cost and profit (or loss), along with you're a break-even point.
There are two ways of calculating this break-even point. TC = TR orFC + VC = P.
X. TC - Total Costs. TR - Total Revenue. FC - Total Fixed Costs. TR - Total Variable Costs. P - Sale Price per Unit. U - Number of Unites SoldYou will find a version of this chart on each of the spreadsheets, with the number of units running along the X axis, and cost/revenue/profit running along the Y axis.
Solving Break Even Analysis ProblemsFor all break-even calculations, you will need to know the fixed costs, variable costs and sales price per unit. Solving for number of unitsThere is a dedicated sheet on the spreadsheet for calculating the break-even number of units. The formula used for this calculation is. X = FC / ( P - VC )The definition of the variables used in this equation are listed below:.
X - Number of Units to Break-Even. P - Sale Price per Unit. FC - Total Fixed Cost. VC - Total Variable Cost Per UnitEnter your unit sale price above the chart, and use the areas below it to enter your fixed and variable costs. Tension only spring space gassy.
The fixed costs section should be used for entering costs that do not vary depending on the number of units sold or manufactured, for example rent. The variable costs is split into two sections, one for costs equating to a dollar amount per unit, for example, manufacturing costs, and another for percentage costs per unit, e.g.
A licencing fee or commission.Once you have entered all of this information, the chart will show you your total revenue, total cost and profit (or loss) based on the number of units sold. Below the chart, you will find the number break-even units and break-even sales. Solving for the Break-Even PriceThe next sheet on the spreadsheet calculates the break-even price per unit. This can be useful if you want to try and calculate the price you need to sell a set number of units at in order to break-even. The calculations used for this are. P = 1 / ( 1 - VC-P ). ( VC-D + ( FC / X ) ).
P - Sale Price per Unit. X - Number of Units to Break-Even. FC - Total Fixed Cost. VC-P - Total Variable Cost Per Unit Percentage-Based.
VC-D - Total Variable Cost Per Unit Dollar-BasedAt the top of the sheet, enter the number of units you are looking to sell. As with the break-even units sheet, enter your fixed and variable costs below the chart in the appropriate sections. Again, the chart will show you your total revenue, total costs and profit (or loss) based on the number of units sold. This time however, the focus is on the unit sale price information. The chart shows the total revenue at which you will break-even, and below the chart, this information is given, along with the break-even sales and number of units (as entered at the top of the sheet). Solving for the payback periodUnlike the other two break-even calculations, the payback period requires fixed costs and start-up costs to be split, for example, a piece of manufacturing equipment may only need to be purchased once, whereas rent is an ongoing fixed cost.
T = SC / ( ( P - VC ). x ) - RFC. T - Payback Period in months. SC - Total Start-up Costs. P - Sale Price per Unit. VC - Total Variable Cost Per Unit. RFC - Total Recurring Fixed Cost.
x - Number of Units sold per monthEnter your unit sale price and number of monthly number of units at the top of the page. As before, there is space to fill out your recurring fixed and variable costs, and additionally for this spreadsheet, there is a section for entering your start-up costs.To the right of the data entry section, a chart will again show you the total revenue, total cost, and profit (or loss). Below the chart, you will find all of the information you have input, along with the break-even time and break-even units.
Solving for break-even salesThere are two methods of calculating the break-even sales as a dollar amount. S = P. MU. T. S - Break-even sales. P - Sale Price per Unit. MU - Number of units per month.
T - Payback period in monthShould you require a certain profit level, adding this into your fixed costs will allow you to calculate your break-even sales after taking this into consideration. There are a number of reasons why this could be helpful, for example if you are relying on the profits for your personal income, rather than taking a salary that is already accounted for within the fixed costs. Gm 4.3 industrial engine parts.
Net Profit Before TaxThe Break-even (Payback Period) sheet contains a chart and table for the net profit before tax (NPBT). The NPBT is a commonly used measure of profitability, and is sometimes also referred to as earnings before tax, or pre-tax profit. As the name suggests, it is calculated by subtracting expenses, with the exception of corporate income tax, from incomeOn the spreadsheet itself, the net profit before tax can be calculated by selecting the period (number of months), and number of units you want to calculate for. You may wish to use your solved payback period, or number of units for this calculation, or might prefer to look over a set period of time, for example six months or a year. Using this information, along with the costs and revenue information entered elsewhere on the Break-even (Payback Period) sheet, the NPBT calculator will tell you the total number of units sold, total cost and total revenue, along with a value for the NPBT. Related Content.
Break Even Analysis With Multiple Products -Sales Mix: Definition and Explanation of SalesMix:Theterm 'sale mix' refers to the relativeproportion in which a company's products are sold.The concept is to achieve the combination, that willyield the greatest amount of profits. Most companieshave many products, and often these products are notequally profitable. Hence, profits will depend tosome extent on the company's sales mix. Profits willbe greater if high margin rather than low marginitems make up a relatively large proportion of totalsales.Changes in sales mix can cause interestingvariation in profits. A shift in sales mix from highmargin items to low margin items can cause profitsto decrease even though total sales may increase.Conversely, a shift in sales mix from low marginitems to high margin items can cause reverseeffect-total profit may increase even though totalsales decrease. It is one thing to achieve aparticular sales volume; it is quite a differentthing to sell most profitable mix of products. Sales Mix and Break Even Analysis:If acompany sells multiple products, break even analysisis somewhat more complex than discussed in the topic.
The reason is thatthe different products will have different sellingprices, different costs, and different contributionmargins. Consequently, the break even point willdepend on the mix in which the various products aresold. Example:1AB CompanyProduct AProduct BTotalSales$20,000100%100,000100%Less Variableexpenses15,0000%55,00055%Contributionmargin5,0000%45,00045%Less fixed expenses27,000Net operatingincome18,000Calculation ofbreak even point:Fixed expenses/ Overall contribution margin27,000 / 0.45$60,000$60,000 sales represent the break even point for thecompany as long as the sales mix does not changes.If the sales mix changes, then the break even pointwill also change. This is illustrated in example 2. Example: 2AB CompanyProduct AProduct BTotalSales80,000100%100,000100%Less variableexpenses60,0000%70,00070%Contributionmargin20,0000%30,00030%Fixed expenses27,000Net operatingincome3,000Calculation ofbreak even point:Fixed expenses/ Overall contribution margin$27,000 / 0.3$90,000Although sales have remained unchanged at $100,000,the sales mix is exactly the reverse of what it wasin example1, with the bulk of sales now coming fromthe less profitable product A. Notice that thischange in the sales mix has caused both the overallcontribution margin and total profits to dropsharply.
The overall contribution margin ratio (CMratio) has dropped from 45% to 30% and net operatingincome has dropped from $18,000 to $3,000. Thecompany's break even point is no longer $60,000 insales.
Since the company is now realizing lesscontribution margin per dollar of sales, it takesmore sales to cover the same amount of fixed costs.Thus the break even point has increased from $60,000to $90,000 in sales per year.Real BusinessExample:RogerMaxwell grew up near a public course wherehe learned the game and worked as a caddie.After attending Oklahoma State on a golfscholarship, he became a golf pro andeventually rose to become vice president atMarriot, responsible for Marriot's golfcourses in the United States. Sensing anopportunity to serve a niche market, Maxwellinvested his life savings in opening his owngolf superstore, in Celebration of Golf (ICOG),in Scottsdale, Arizona. Maxwell says, ' I'drather sacrifice profit up front forsizzle.people are bored by malls. Theyare looking for something different.'
Maxwell has designed his store to be amuseum-like Mecca for golfing fanatics. Forexample, maintenance work is done in areplica of a turn of the century clubmaker's shop.Maxwell'sapproach seems to be working. In the secondyear of operation, Maxwell projected aprofit of $81,000 on sales of $2.4 millionas follows:ProjectedPercent of SalesSales$2,400,000100%Costof Sales1,496,00062.33%Othervariable expenses296,00012.33%Contribution margin608,00025.33%Fixedexpenses527,000Netoperating income$81,000Happily forMaxwell, sales for the year were even betterthan expected - reaching $3.0 million. Inthe absence of any other change, the netincome should have been approximately$233,000, computed as follows:ProjectedPercent of SalesSales$3,000,000100%Costof sales1,870,00062.33%Othervariable expenses370,00012.33%Contribution margin760,00025.33%Fixedexpenses527,000Netoperating income$233,000Howevernet income for the year was actually$289,000 - apparently because of favorableshift in sales mix toward higher margin item.A 25% increase in sales over the projectionsat beginning of the year resulted in a 356%increase in net income. That's leverage!Source: Edward O. Welles, Going for theGreen,' Inc., July 1996, pp.68-75.Relevant Articles: »»»»»»»»»»A D V E R T I S E M E N T. Financial Accounting Topics.
ManagerialAccounting Topics.
The breakeven point in a Break Even analysis is the amount of sales you are required to generate to take care of all the fixed and variable costs and break even. At this point, the business has neither made any profits neither has it made any losses you Broke Even. Breakeven point during a Break Even analysis is calculated with three elements: fixed costs, sales and variable costs. Variable costs are those costs that favor your sales, which mean if sales go up they go up as well for example labor and materials.
You can also see here. Knowing your variable costs and your sales, then you can calculate your margin. Fixed costs are those that stay fixed no matter the sales level for example rent. Your records need to be very accurate in order for you to use them in the calculations.Break Even analysis template will then be used to determine your pricing, variable costs and the overhead. The calculation of the breakeven point on the key business components will help uncover the non-performing SKUs, the areas where you are overspending as well as unprofitable customers. You may also see. At the time of launching the new product or redefined the existing product the company needs to analyze the each and every cost related to the product fixed as well as variable to reach the break even point.
This break even analysis helps to ascertain the sales generated for the product. The Break Even analysis of the project involves the calculation of all the cost, whether fixed and variable for the concerned project. This analysis helps to ascertain the budget and break even point for the project. It evaluates the non required cost or overspending. The results recorded in the break even analysis template will then help you set better targets aimed at generating more profits for the company and how to best do this.
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