As you explore Break Even Point (BEP) calculations, you will initially encounter it as if it were applied to a single product. However, the challenge lies in translating theory into practical application, especially when dealing with a diverse product portfolio.
If you are selling multiple products, the quest for precision in determining the BEP becomes paramount. So, let's embark on this journey with an example:
STEP 1: SALES BY UNITS
Determine the number of units sold within a specified time frame, for example, a one-year period. Include all SKUs that were sold.
Product A: 321 units
Product B: 420 units
Product C: 550 units
Note that adding more SKUs will expand the table.
STEP 2: TOTAL UNITS
Calculate the total units sold. Initially, it might seem unusual to sum units that may not be in the same category, but this is necessary for calculating percentage participation.
321 + 420 + 550 = 1,291 units
STEP 3: PERCENTAGE OF PARTICIPATION
Calculate the percentage of units for each product by dividing the units sold per product by the total units, then multiply by 100.
% Product A: (321 / 1,291) * 100 = 24.86%
% Product B: (420 / 1,291) * 100 = 32.53%
% Product C: (550 / 1,291) * 100 = 42.60%
STEP 4: SALES PRICE PER UNIT (SPPU)
Determine the price per unit for each product.
SPPU Product A: $1000
SPPU Product B: $900
SPPU Product C: $700
STEP 5: COST PER UNIT (CPU)
Determine the cost per unit, which requires calculations based on your purchase cost to supply your business.
CPU Product A: $400
CPU Product B: $320
CPU Product C: $280
STEP 6: WEIGHTED AVERAGE PRICE
Use the weighted average formula.
($1000 * 24.86%) + ($900 * 32.53%) + ($700 * 42.60%) = $840
In Microsoft Excel, use the SUMPRODUCT formula, but ensure you select the row with the percentage of participation and the corresponding sales price per unit. Use the ROUNDUP formula.
STEP 7: WEIGHTED AVERAGE COST
Again, use the weighted average formula.
($400 * 24.86%) + ($320 * 32.53%) + ($280 * 42.60%) = $323
In Microsoft Excel, use the SUMPRODUCT formula by selecting the row with the percentage of participation and cost per unit. Use the ROUNDUP formula.
STEP 8: FIXED COST
Determine your total fixed costs for the period.
$500,000
STEP 9: CONTRIBUTION MARGIN
Calculate the contribution margin by subtracting the cost per unit from the sales price per unit.
CM Product A: $1000 - $400 = $600
CM Product B: $900 - $320 = $580
CM Product C: $700 - $280 = $420
STEP 10: WEIGHTED AVERAGE CONTRIBUTION MARGIN
Once more, apply the weighted average formula.
($600 * 24.86%) + ($580 * 32.53%) + ($420 * 42.60%) = $517
In Microsoft Excel, use the SUMPRODUCT formula with the percentage of participation and contribution margin. Use the ROUNDUP formula.
STEP 11: BREAK EVEN POINT (BEP)
Calculate the Break Even Point by dividing the fixed cost by the weighted average contribution margin. Use the ROUNDUP formula.
BEP: $500,000 / $517 = 968 units
STEP 12: BEP REVENUE
Calculate the Breakeven Point revenue, multiplying the BEP by the weighted average price.
968 * $840 = $813,120
STEP 13: BEP BY PRODUCT
Calculate the Break Even Point for each product by multiplying the BEP by the respective percentage of participation.
BEP Product A: ($968 * 24.86%) = 241 units
BEP Product B: ($968 * 35.53%) = 315 units
BEP Product C: ($968 * 42.60%) = 412 units
The BEP analysis helps understand where you can start to get revenue without losing money. The main goal is always to surpass this point. In the example, you need to sell 968 units of all products to cover the fixed costs and start to generate income.
If you require assistance developing an effective business plan and digital strategy, feel free to reach out for JuanXcel's personalized guidance and support.
Comments