Once you get the hang of it you will find it quick and easy to figure your break-even point using an Excel spreadsheet.
What is break-even point analysis and why is it important?
Break-even point analysis is a very important tool, especially if you are preparing a business plan, to figure out the volume of sales needed to cover both your variable and fixed costs. You have to be able to make your product or provide your service at a price that your customers will pay while still providing an adequate source of left over cash for your personal living expenses.
I am going to present a step by step guide to break-even point analysis for my client's company - Oak Desk Clocks, Inc.
Definition of terms:
- Variable expenses are those expenses that are tied to the number of units sold. For each clock that Oak Desk Clocks, Inc. makes there is a cost of $2.50 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, Inc. lease calls for a monthly rent payment of $1,000. So, no matter if Oak Desk Clocks sells 1 clock or 1 million clocks the company is still responsible for the fixed amount ($1,000) in rent payments each month.
Shown below are my initial entries into my breakeven point Excel spreadsheet. 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.
I have entered into my Excel Spreadsheet the estimates for Year 1, 2006 and also my estimates for increases or decreases per year for each year in the future. I am going to perform break-even point analysis for four years: 2006, 2007, 2008 and 2009.
Open a new Excel Workbook, name it Breakeven Point Analysis and enter these facts and figures exactly as shown: Make sure your figures are placed in column B and D and in rows 6 through 9.
Now, Go To Page 2 of this article where this workbook is expanded to figure break-even point for Oak Desk Clocks, Inc.
