Maybe for Sam’s Beach Umbrella Store it is impossible to sell more than 190 umbrellas in a month. A Break-Even Analysis Is A Reality Check for Your BusinessĪ break-even analysis helps you determine whether your overhead is realistic or needs to be reduced. But, if his sales are greater than $4,000 per month, he is making a profit-$10 for every 200+ umbrellas that he sells each month. If Sam’s sales are fewer than 200 umbrellas (or $4,000) per month, he is losing money-he would lose $10 for every umbrella sold. (Fixed Cost / Gross Profit per Unit) x Sales Price per Unit = He could also think of his break-even in terms of total sales: 200 umbrellas multiplied by $20, which would be $4,000. Since break-even is often thought of in terms of units of items sold, his sales break-even would be 200 umbrellas.

So, his break-even in terms of unit sales is $2,000 divided by $10, or 200 umbrellas per month.įixed Cost / Gross Profit per Unit = Break-Even in Units Then he divides that by the gross profit of $10 that he makes on the sale of each umbrella. Sam determines his break-even cost by starting with his fixed cost of $2,000 per month. Related: Using Income Statements, Balance Sheets, Cash Flows, and Pro Formas to Drive Profitability Sam’s only expense is his rent of $2,000 per month, which also includes the electricity to power the one light bulb in his hut. Sam figures he doesn’t need to advertise because his retail hut is located across the street from a busy beach. Sam is the only employee and pays himself no salary.

The costs of buying umbrellas are variable costs. So, his direct cost of buying the umbrella will fluctuate based on how many umbrellas he sells, whereas his indirect costs will remain fixed. The indirect costs or overhead costs would be the costs of running the store. So, in Sam’s case, the direct cost is the $10 he pays per umbrella to the manufacturer. Gross profit is the profit he makes after subtracting the costs of the item that he is selling, excluding general expenses of running the business. Sales Price / Cost of Goods Sold = Gross Profit Sam buys his umbrellas from the manufacturer for $10 and sells them for $20, making a gross profit of $10 on each umbrella. Let’s take a look at Sam’s Beach Umbrella Store, a retail hut that sells beach umbrellas. It is important to determine this point, as the viability of your business is reliant on staying above this number. A break-even analysis is the sales level that is required for your business to operate without incurring a financial loss.

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