Calculating break-even: additional examples

Please note that the figures used in these examples are purely hypothetical. If you are
planning a business similar to one of the examples, please do not use these figures as an
industry standard. You need to do your own research to find real, market-related figures. The
function of the figures used here is purely to further explain the concept of break-even.
A service business
et!s take a barbershop and let!s suppose the overheads of the business are something like
this"
#wner!s salary $%& '''
$ental $( &''
)ixed wages $( '''
*leaning services $(&'
+lectricity $,&'
Telephone $&''
-aga.ine subscriptions $/'
$epairs and maintenance $0&'
1ecurity $,&'
2ookkeeping $3&'
Total overheads R32 64
In other words, the fixed costs or indirect costs are $40 3,' per month. The business will
spend this amount even if it doesn!t get a single client.
5hat about the direct costs 6variable costs or cost-of-sales78 9ow much does the business
spend every time a client walks in an has his hair cut8 It!s a service business, so direct costs
are usually low. et!s say it looks like this"
*onsumables 6hair gel etc7 $&
2arber!s commission $%'
Total direct cost per sale R!"
The going rate for a hair-cut in the area is $(', and the business owner decides, wisely, to
stick to the going rate.
5hat is his break-even point8
#tep !: 5ork out the gross profit per sale
:ross profit per sale ; sales price < cost-of-sale
Therefore
:ross profit per sale ; $&&
#tep 2: 5ork out the gross profit percentage
:ross profit=sales x %'' ; gross profit percentage
$&&=$(' x %'' ; (/>
1tep 4" 5ork out the break-even point
2reakeven ; overheads=gross profit percentage
Therefore
2reakeven ; $40 3,'=',& ; $,% 4%3
The barbershop therefore has to do $3& 0?'!s worth of hair-cuts a month to break even. That
represents about &/' clients a month, because $3& 0?'=$(' ; &/' per month, or 03 clients a
day.
A retail business
et!s take a lighting shop and guess the overheads as follows"
$ental" $0' '''.
#wner!s salary $%& '''
5ages $%& '''
+lectricity $% &''
Telephone $(&'
1hrinkage $3 '''
1ecurity $?&'
2ookkeeping $3&'
@ehicles and transport $0 (''
Total overheads R62 4"
In other words, the fixed costs or indirect costs are $30 ,&' per month. The business will
spend this amount even if it doesn!t sell a single item.
The direct costs, or cost-of-sales, is of course the amount the business pays for the stock.
et!s say the shop divides its stock into two kinds of items"
%7 amps and fittings. #n these it makes a %''> mark-up.
07 *onsumables 6bulbs, flex etc7. #n these it puts a &'> mark-up.
9ow much does it have to sell to break even8
Step 1: Determine the gross proft percentage of each item.
Lamps: 100%
Consumables: 50%

Step 2: Determine what percentage of your sales each item accounts for.
Lets assume lamps account for 90% of the shops sales an! consumables
10%
Step 3: "ultiply the gross proft percentage of each item by the percentage
of sales that it accounts for.
Lamps: 100% # 90% $ 90%
Consumables: 50% # 10% $ 5%
Step 4: %he sum of all these fgures gi&es you the a&erage gross proft
percentage.
90% ' 5% $ 95%
The breakeven is overheads divided by average gross profit percentage, therefore
$30 ,&'='./& ; $3& (43 total sales per month.
A manu$acturing business
et!s say a boat builder!s overheads look like this"
$ental" $%' '''
#wner!s salary $0' '''
5ages $0& '''
+lectricity $( '''
Telephone $(&'
1ecurity $?&'
2ookkeeping $3&'
@ehicles and transport $3 &''
Total overheads R% %"
9e builds two kinds of boats, with the following cost of sales 6direct costs7"
%7 $acer" $,0 &3,
07 )isheagle" $0& /4&
9e sells the boats for the following prices"
%7 $acers" $// '''
07 )isheagle" $&/ '''
5hat is his breakeven point8
Step 1: Determine the gross proft percentage of each item.
(acers: :ross profit=sales price x %'' ; gross profit percentage ; &(>
)isheagle" :ross profit=sales price x %'' ; gross profit percentage ; &3>
Step 2: Determine what percentage of your sales each item accounts for.
Lets assume he sells two fsheagles for e&ery racer so that racers account for
)*% of his sales an! fsheagles 5)%.
Step 3: "ultiply the gross proft percentage of each item by the percentage
of sales that it accounts for.
(acers: 5+% # )*% $ 0.5+ # 0.)* $ ,*%
-isheagles: 5)% # 5*% $ 0.5) # 0.5* $ .0%
Step 4: %he sum of all these fgures gi&es you the a&erage gross proft
percentage.
,*% ' .0% $ 5*%
The breakeven point is overheads divided by average gross profit percentage, therefore"
$(' (&'='.&3 ; $%0& 44/!s worth of boat sales per month. Therefore, at least two fisheagles
per month or at least a racer and a fisheagle.
2ecause his products are large sales, he may not sell anything in certain months, and Auite a
few in other months. It may therefore be useful to get an annual overview"
Bnnual breakeven ; $%0& 44/ x %0 ; $% &', '3?. 5ith a ratio of one racer to two fisheagles,
he!ll therefore have to sell about ( racers and %& fisheagles per year to break even.