Task 2b Break even for multiple product businesses

How to Calculate Your Breakeven Point when you sell multiple products/services.

For your business plan you should calculate both how much revenue from sales is required to break even and how many units need to be sold

You need the following information before you can do this:

A) The variable cost price per unit (how much has it cost you to make or buy your product/service)

B) Your selling price per unit (FYI after completing your break-even  you may decide to raise or lower your selling price)

C) The number of units you can make or sell in a given period of time such as a year (This will tell you how much you will spend on your stock and how much revenue it will bring in) 

D) Your total fixed costs for the same time as C above (you might want to include utilities, wages etc in this to give you a better idea of what your sales need to be to cover all your costs.

 

This break even formula assumes that the business will sell equal amounts of each product!
If your business has an equal amount of each product please do steps 1,2 and 3 to calculate break-even.
If your business has different levels of each stock item then do steps 1,2,3 and 4 to calculate break-even.

Writing in (italics and brackets is advice or an explanation)

Scenario: You need to calculate the monthly break-even for a business that sells two products that have a different variable cost price and the same selling price.

• A  firm sells two products, chairs and bar stools, for £50 per unit and the variable costs are £25 per unit for chairs and £20 per unit for bar stools.
• The fixed costs for the firm are £20,000 per month.
• If the sales mix is 1:1 (one chair sold for every bar stool sold), what is the breakeven point in pounds of sales and in units of chairs and bar stools?

(As this business has two products that sell equally but have a different cost they will both contribute a different amount to the businesses profits. The % or decimal amount can be calculated as follows it does not matter if you use % or a decimal point in your calculations)

1) You must compute the "weighted average" or gross margin profit percentage for each product, which is calculated as the sum of the gross margin percentage for each product multiplied by its percentage of sales.

• The chair has a gross margin  profit percentage of 50 percent or .5 (£50-£25) /.50
• The stool has a gross margin  profit percentage of 60 percent or .6: (£50-£20) /.50
•  (If there were four products the /.50 would change to /.25. If there were 10 products it would change to /.10 etc)

2) As there are two products being sold Each product accounts for 50 percent of the unit sales of the firm (meaning a 1:1 sales mix).
Therefore, the weighted average gross margin is calculated as follows: 

• Chair: 50% x 50% = 25%

• Stool: 60% x 50% = 30%

• Weighted average gross margin = 55% (25% + 30%)

Then, you would use the weighted average percentage in the breakeven formula as follows:
breakeven = £20,000 /.55 = £36,363.

3) To calculate the unit sales of each product needed to break-even , take the breakeven sales, multiply by the product's sales mix, and then divide by its price as follows:

• Stools to sell = £36,363 x .50 /£50 = 363 stools

• Chairs to sell = £36,363 x .50/£50 = 363 chairs

(For your business plan you should calculate both how much revenue from sales is required to break even and how many units need to be sold)

4) The break-even point would either be lower or higher depending on which product sold better.
For example If the above Business were to have sales of 70 percent stools and 30 percent chairs, the breakeven point would be reduced to £35,088 because the weighted average gross margin increased to 57 percent.

 Conversely, if the business were to sell 30 percent stools and 70 percent chairs, the breakeven point would be increased to £37,736 because the weighted average gross margin decreased to 53 percent.


This is an edited version of an article by Ian Benoliel and the original is available from here. at http://www.entrepreneur.com/article/52102
It is intended to be used as a reference for academic purposes.