Jason Dinesen

Jason Dinesen

On Posted on by Jason Dinesen to Small Business Tax and Accounting

Breakeven Analysis for Small Businesses, Part 2

income-tax-491626_1280 (2)In part 2, we’ll look at variations on the breakeven formula and analysis.

For example, what if you sell multiple products? This quite likely with a typical small business.

The first thing you need to figure out is your “sales mix.”

Sales mix is the amount of sales of each product you sell.

Example

Your fixed costs are $52,000. You have 3 products with the following sales prices and variable costs:

 

Product X Product Y Product Z
Sale Price 100 50 30
Variable Costs 50 30 10
Contribution Margin 50 20 20
Percent of Sales 20% 30% 50%

From here, you need to determine your “weighted average sales price.” This is not as hard or ominous as it sounds!

  1. Product X sells for $100 and makes up 20% of your sales. $100 x 20% = $20
  2. Product Y sells for $50 and makes up 30% of your sales. $50 x 30% = $15
  3. Product Z sells for $30 and makes up 50% of your sales. $30 x 50% = $15
  4. $20 + $15 + $15 = $50

Your weighted average sales price is $50.

Then, we use the same process to calculate our weighted average variable costs.

  1. Product X: $50 x 20% = $10
  2. Product Y: $30 x 30% = $9
  3. Product Z: $10 x 50% = $5
  4. $10 + $9 + $5 = $24

Your weighted average variable cost is $24.

Now What?

Now it’s a matter of using the basic breakeven formula.

Average sales price of $50 – Average variable cost of $24 = $26 contribution margin.

Fixed costs are $52,000. $52,000 / $26 contribution margin = 2,000 units

You’ll need to sell 2,000 units at your sales mix percentage in order to break even.

  • Product X: 2,000 x 20% = 400 units
  • Product Y: 2,000 x 30% = 600 units
  • Product Z: 2,000 x 50% = 1,000 units

If we sell each product at these levels, you’ll break even.

Problems

The problem with this (and with breakeven analysis in general) is if your sales mix varies at all, it throws off the entire calculation.

Breakeven analysis is not an exact science, especially for a small business that probably doesn’t have the resources to run this calculation with high precision.

I tell people that this is still an important exercise to go through so you get a general idea of how much you need to be selling, and how much you need to charge, so you can at least break even and hopefully turn a profit.

And of course, a good accountant can help with this analysis.

Image courtesy of user stevepb on Pixabay.com

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