Let’s say that you want to start a burger bar, not unlike, but much better than McDonalds of course. How many burgers do you need to sell to break even?
Very crudely, the break-even point is reached when your total sales revenue (total sales revenue = per unit price × number of units sold) completely covers all costs (both fixed and operational) and there is nothing left, not even a profit. Clearly you want to do better than this, but it is useful to know where this point is, i.e. how many units do you need to sell? Sell more than the break-even number and you make a profit, sell less and you’re going broke.
Now for some terminology …
Contribution Margin is the amount per item sold that contributes towards paying for fixed costs (overheads) and provides for some profit.
Contribution Margin = Sale Price per unit – Total Variable Costs per unit
For example, if the Sale Price per burger is $9 and Total Variable Costs are $6, then the Contribution Margin per burger is $3 ($9 – $6).
|Typically, operating restaurants have the following cost structures:
Let’s further say that your total fixed costs are $70,000 per year, and this allows for $44,000 as a salary for you.
How many burgers do you have to sell to reach the break-even point?
Break-even reached when the following are sold:
- 23,333 burgers per year ($70,000 ÷ $3)
- 467 burgers per week for a 50-week year (23,333 ÷ 50)
- 93 burgers per day per 5-day week, per 50-week year (467 ÷ 5)
Let’s extend the example by aiming to earn a reasonable profit, say $20,000 per year. This brings our total target revenue or sales figure to $70,000 + $20,000 = $90,000 per year.
Now how many burgers do you need to sell to reach the break-even with profit:
- 30,000 burgers per year ($90,000 ÷ $3)
- 600 burgers per week for a 50-week year (30,000 ÷ 50)
- 120 burgers per day per 5-day week, per 50-week year (600 ÷ 5)
Disadvantages of break-even analysis include assuming that the selling price is constant at all level of production, that whatever is produced can be sold at the price specified, and that the analysis only applies to a single product. Despite these limitations, the above exercise is something that all SMEs should go through. The scary thing is that the numbers are relatively realistic. Sure, in your case your rent might be higher, or lower, and your variable costs will be different too. You will also likely sell higher margin products such as soft drinks, milkshakes, and lollies. You will also have to cater for theft and wastage. But that is all beside the point (no pun intended). For your circumstances, you need to know what your break-even points are.
Finally, I need to be blunt, like a large rock to the head. The numbers above reveal what must be achieved every day, every week, and every year. Sure, you’ll have lows and highs, and I don’t particularly like averages, but just remember that during low periods you will not able to pay all your bills and as such your debt will likely increase along with your interest payments, making it all the harder to recover should a high period ever return.
Using my calculator to simulate selling greeting cards for instance, and changing the selling price to $6, the variable costs to $2, and therefore the contribution margin to $4 while leaving everything else the same, the break-even sales numbers to pay all costs and achieve profit target are:
- 22,500 sales per year ($90,000 ÷ $4)
- 450 sales per week for a 50-week year (22,500 ÷ 50)
- 90 sales per day per 5-day week, per 50-week year (450 ÷ 5)
Is this in any way remotely realistic?
Below is a graphical representation of what we have discussed from https://www.101computing.net/break-even-point/