We will use the above information to calculate the number of watches (units) and the sales dollars we need in order for our flea market business to break even for the day.

There are three methods that can be used to calculate our break even point:

• Equation Method
• Contribution Margin Method
• Graphic Method

Basic Breakeven Equation Method

Sales = Variable Expenses + Fixed Expenses + Profit
Let's adopt this equation and calculate the number of watches that we must sell in order to breakeven.

The basic breakeven equation becomes:
Unit Selling Price X Number of Units Sold =(Unit Cost X Number Of Units Sold) + Fixed Costs + Profit
Let X = Number of units (watches) that need to be sold to break even
$20.00X = $10.00X + $100.00 + 0
$10.00X = $100.00 + 0
X = ($100.00 + 0) / $10.00
X = 10 units (watches)

Breakeven Number of Watches is 10

We can easily calulate the dollar sales necessary to break even by multiplying the sales price of the watches by the break even number of watches.
Break Even Sales Dollars = 10 (watches) x $20.00/per watch

Break Even Sales Dollars = $200.00

Sales of Watches Cost of Watches Booth Rental (Fixed Cost) Profit

10 watches @ $20.00 10 watches @ $10.00

$200.00 100.00 100.00 $0.00

Contribution Margin Method

The Unit Contribution Margin is the difference between your product's unit selling price and its unit variable cost.
Unit Contribution Margin = Unit Sales Price - Unit Variable Cost

Unit Contribution Margin (watches) = $20.00 - !0.00
Unit Contribution Margin = $10.00

Breakeven Point = (Fixed Expenses + Desired Profit) / Unit Contribution Margin
Let X = Number of units (watches) that need to be sold to break even
X = ($100.00 + 0 ) / $10.00
Look at the highlighted line in the Basic Breakeven Equation. It's the same as the line above. The contribution margin method is merely a shortcut version of the Basic Breakeven Equation Method.

X = 10 units (watches)

You can use either method to calculate breakeven units and/or sales dollars. The choice is a matter of personal preference.

What if you want to see how many units you need to sell to not just breakeven but make a certain amount of profit ? If you want to make a profit of $200.00 from you sale of watches at the flea market all you need to do is include your desired amount of profit in your breakeven calculation.

Breakeven Point = (Fixed Expenses + Desired Profit) / Unit Contribution Margin
X = ($100.00 + $200.00 ) / $10.00
X = $300 / $10.00
X = 30 units (watches)

Let's do one more thing to check our calculation. We'll construct a simple profit and loss statement.

Sales of Watches Cost of Watches Booth Rental (Fixed Cost) Profit

30 watches @ $20.00 30 watches @ $10.00

$600.00 300.00 100.00 $200.00

Sure enough, if we sell 30 watches at the flea market we'll make a profit of $200.00.

The term contribution margin may be expressed as a total dollar amount, as an amount per unit (as the prior example), or as a percentage. In our last example

• Unit Contribution Margin is Unit Selling Price less Unit Variable Cost or $20.00 - $10.00 = $10.00
• Total Conribution Margin is Units Sold multiplied by the Unit Contribution Margin 30 watches X $10.00 = $300.00
• Percentage Contribution Margin is the Unit Contribution Margin / Unit Selling Price or $10.00 / $20.00 = 50% or .50

Using our example where we wanted a profit of $200.00 on our sale of watches, we can calculate the Sales Dollars Needed with another variation of the Breakeven Equation.
Sales Dollars Needed = (Fixed Expenses + Desired Profit) / Contribution Margin Ratio
Sales Dollars Needed = ($100.00 + $200.00) / .50
Sales Dollars Needed = $600.00

Graphical Approach

Since some of the sites I recommend later for further study have a detailed discussion of the graphical approach, I'm only going to provide you with a brief description.

The graphical approach has an X-axis (horizontal) that repesents Units (volume) and a Y-axis (vertical) that represents Dollars and contains lines for:

• Sales
• Variable Costs (Expenses)
• Total Costs (Expenses)

The point on the graph where the Sales and Total Cost (Expense) Lines intersect is the breakeven point.

Another graph that is often used to compare how alternatives on pricing, variable costs, or fixed costs may affect net income (profit) as volume changes is called a P/V Chart or Profit-Volume Graph.

Other Comments

Our simple Flea Market example assumed we're only selling one product. Most businesses sell many products and use techniques that factor their sales mix into the breakeven analysis. We have just touched on how to use break-even anlysis. It may appear that you have to be good at math and equations, but all you really need is to become familiar with the the tool, learn how to classify cost as fixed and variable, and use a computer program or spreadsheet template that automates the calculations, presents the results, and even provides graphs if desired.

If you would like to learn more about Cost-Volume-Profit Relationships and Break-Even Analysis and build on the basics that I have presented I recommend that you visit the following sites:

• KnowledgeDynamics
  I luckily ran across this site by accident. This site is just too good to miss if you really want to learn how to use Break-Even Analysis. Their Break-Even Analysis Simulation is a new, revolutionary type of e-Learning course. Unlike other e-learning courses, you will learn-by-doing in a realistic, yet risk-free environment. After completing their Simulation, you will be able to:
  • Derive and explain the Break-Even formula
  • Classify various costs as either fixed or variable
  • Calculate the Break-Even volume and date for a given venture
  • Explain the impact of various manufacturing and marketing decisions
• BuzGate
  Good introduction to breakeven anlysis and how this tool can help your business in making decisions.
• Fixed and Variable Costs
  CCH Business Toolkit
  Before you can use cost/volume/profit analysis to help you evaluate your business's operations, you need to get a handle on the fixed costs of your business, as compared to your variable costs.
• HBS Break Even Analysis Toolkit
  Link Courtesy of Wachowicz's Web World (John Wachowicz-Professor of Finance University of Tennesee) and Harvard Business School.
  Downloadable interactive workbook from the HBS Toolkit helps calculate a break-even point or target-profit level based on the fixed costs, variable costs, and unit price of the product or service being analyzed.
• Estimating Breakeven Sales for Your Small Business
  PDF Document courtesy of Purdue University Extension
• Breakeven Analysis CCH Business Owner’s Toolkit
  A tool for management decision making that has grown out of cost/volume/profit.
• Sales Volume Breakeven Analysis
  CCH Financial Planning Toolkit – Find out how many and at what price you must sell your product in order to make a profit.
• Break-Even Point Analysis
  Provided by bizbound.com