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Break-even Point Explained With An Example - Boomy Tokan - YouTube
Channel: Start Your Own Business Academy
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hi there in our series on financial
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basics I want to cover breakeven
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analysis or what other people call
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break-even point my name is boo Motoko
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breakeven and ice is a very useful tool
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that you can use to determine how much
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in terms of unity need to sell to cover
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all your costs or how much sales you
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need to make to also cover all your
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costs so it's a very useful tool both
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before you start in business or even
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whilst in business so let's get started
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in this video we're gonna cover an
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example of breakeven by number of units
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that need to be sold
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we also gonna look at what breakeven
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means how it is used specific terms to
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remember the break-even formula itself
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and also how to calculate break-even all
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right
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breakeven really when we think about a
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definition that we can use the main
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reason for working out a break-even
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analysis is to ensure you fully
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understand and comprehend the amount of
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units you need to sell so that you are
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covering all your costs and really
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making no losses it can be used to do
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two things to calculate the number of
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units you must sell to breakeven or to
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calculate the amount of sales that must
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be made in monetary value to actually
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achieve a break-even point so now here
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four terms you need to remember the
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first one is your selling price the
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price of which you are selling your
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products the second one is the variable
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cost or cost of goods sold which are the
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costs that are directly incurred in
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order to make each cell or which vary
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with output ie raw materials if you're
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selling books for example the cost of
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printing and paper costs for each book
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will be a variable cost or cost of goods
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sold the third term to remember is
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contribution or gross profit it's going
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to become very important later on which
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is the difference between the selling
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price and the variable costs or cost of
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goods sold the contribution
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Azariah get the contribution is the
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friends between the selling price and
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the variable cost finally fixed costs
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are the costs that do not vary with
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output typically rent and wages do not
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vary with the volume of cells that you
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make except of course wages would vary
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if you were paying on Commission basis
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but typically they don't vary with the
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amount of sales that you make so it
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lands itself in the fixed cost arena so
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let's look at the break even formula and
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start working our way through now the
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break-even formula is fixed costs
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divided by the contribution that would
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give you the break-even in terms of the
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number of units you need to sell
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remember we said that breakeven can be
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used to calculate two things one is the
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unit you need to sell or the monetary
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value of sales in it to make in this
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first example we're only gonna look at
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the break-even in terms of the units in
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it to sell so that formula will be fixed
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cost divided by contribution to achieve
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breakeven the second type of breakeven
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which are going to look at the next
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video will be breakeven in terms of
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sales volume that needs to be achieved
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so that breakeven will be calculated by
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multiplying the break-even in units by
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the selling price and that would give us
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the amount of sales we actually need to
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generate to make the breakeven in terms
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of sales volume alright but we'll come
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to that in the next video so in this one
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we're focusing on breakeven to determine
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the number of units of sales we need to
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make all right so how do you calculate
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this well to calculate your breakeven
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you need two very important figures the
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first one is the contribution or gross
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profit which is the difference between
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your sale price and your variable cost
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remember we talked about that earlier
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and the second important figure you need
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is your fixed cost the total fixed cost
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all right once we have that we can then
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go and do an example
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look at this example well you get other
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business selling digital information
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products online and this information
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product costs $100
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so the selling price is $100 and the
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variable cost which is the cost that
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vary in accordance with the numbers of
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units sold that cost is $20 for this
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example and the fixed cost the total
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fixed cost for a particular period which
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were looking at I say let's take an
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example of a month the total fixed cost
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is $2,000 so we have selling price for
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$100 variable cost $20 and fixed cost
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$2,000 to work out the break-even it
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will be as we said earlier also fixed
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cost divided by contribution that would
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give us the number of units the
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break-even point the number of units
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that we need to sell to cover all our
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costs so from the example from the
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example we use in fixed cost remember
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it's $2,000 now
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we need to calculate the contribution or
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what we called gross profit so what's
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that that's gonna be selling price of
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hundred dollars minus the variable cost
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of $20
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remember that variable cost a cost of
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goods sold is the cost of vary with
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output so every single unit sold
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actually costs $20 for every single unit
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so we deduct the selling price from the
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variable cost and we have $80 so the
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contribution or gross profit we're going
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to use the word contribution from that
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the contribution is actually $80 so
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remember the formula the formula is
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fixed cost divided by contribution will
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give us the break-even in terms of units
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the fixed cost is $2,000 the
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contribution of gross profit is $80 and
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that gives us a figure of 25 units which
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is the break-even point in terms of the
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number of units that
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must be sold to cover all the costs of
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running the business of putting their in
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bold letters 25 minutes of information
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products needed to be sold to cover the
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costs of running the business so in
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terms of this particular example we must
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sell 25 units of information product at
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$100 each to cover all our costs for
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running the business alright in this
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video we've looked at an example or
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breakeven by number of units what it
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means how it is you specific terms to
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remember the break-even formula and
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we've calculated it by an example and
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now in the next video we're gonna come
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to how to calculate the amount of sales
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that must be made in monetary value to
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achieve breakeven which is the next
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video in our series on the break-even
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right if you like this video like it if
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you like it share it subscribe to my
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channel write a question or comment
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below or and email me if it's a private
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one boo me at start your own business
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academy.com
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I look forward to seeing you soon and
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give me some feedback let me know what
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you think of this video talk to you soon
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bye
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