Learning the Importance of Breakeven Point Analysis

Learning the Importance of Breakeven Point Analysis Breakeven point analysis is a very important tool, especially if you are preparing a business plan, to figure out the volume of sales your arts and crafts business needs to make in order to cover both your variable and fixed costs. At breakeven point, your arts and crafts business has made or lost no money. This is important info for you, the business owner, as you have to be able to handcraft your arts and crafts items at a price that your customers will pay while still providing an adequate amount of income to cover your personal living expenses. Once you get the hang of it you will find it quick and easy to figure breakeven point using an Excel spreadsheet. Breakeven Point by Item or Entire Business When discussing breakeven point analysis with clients, the goal is to figure it for either their entire business or by-product. While its more difficult to figure breakeven point for every item you make (this is more of a job costing extravaganza), its not impossible. Later on, well show you how to do a rough breakeven by item. Exploring Breakeven Point Analysis Consider the following scenario: One day a potential client walks through the office door, who is wondering whether they should go ahead and open an arts and crafts business. The clients main concern is whether they will be able to cover all their business costs. They also want to know how many arts and crafts items they will have to sell to pay themselves a certain amount of income each month. They have done their preliminary research, including lining up raw materials suppliers and getting price lists from those suppliers. Importantly, they have also found out what they need to do to become a wholesale customer of the suppliers and discount terms. The craft business owners have also made prototypes of the items to get an idea of how much raw material will be needed if the business goes into production mode. Walking Through Breakeven Point Facts Using a handy-dandy spreadsheet program, were going to present a step-by-step guide to breakeven point analysis for our fictitious new arts and crafts client - Oak Desk Clocks, Inc. Before we set up breakeven point analysis for them, we need some basic cost facts and figures: Variable expenses are those expenses that are tied to the number of units sold. For each clock that Oak Desk Clocks, Inc. makes they figure there is a cost of $25.00 for the combined total of material and labor.Fixed expenses are those expenses that do not change based upon the increases or decreases in the sales of your desks. A very good example of this is rent expense. Oak Desk Clocks lease calls for a monthly rent payment of $1,000. So, no matter if Oak Desk Clocks sells one clock or a million, the company is still responsible for the fixed amount ($1,000) in rent payments each month. Setting Up Breakeven Point Analysis Shown below are the initial entries we plan to make into a breakeven point spreadsheet for Oak Desk Clocks, Inc. None of these entries require any formulas - these are just the assumptions the owners of Oak Desk Clocks have made based upon their research into the clock-making industry. Sales price per clock is $35.00 with an expected increase in sales price of 10% per year.Variable costs per clock are $25.00 with an expected increase in the price of raw materials and labor of 5% per year.Fixed costs per year are $75,000, which Oak Desk Clocks feels will remain constant over the next five years.Advertising expense of $15,000 will be a major expense in the first year of business but should decrease by 12% each year over the next five years.