How to calculate the break-even point of your product

This is the volume of sales (the level of product sold) made when the total sales revenue becomes equal to the total cost of product.  The break-even point helps us determine the amount of products needed to be sold in order to recover the fixed and the variable costs.
Any revenue generated beyond this break-even point results into profit.

Graphical representation:

Image from simplestudies.com

Calculating break-even point

Break-even point = Total Fixed Cost per month / (Selling Price per unit - Average Variable Cost per unit )
                                               TFC / (SP - AVC)


A company's total fixed cost for manufacturing a T-shirt is £500 each month and the total variable cost for manufacturing 1000 T-shirts for that month is £2,500. If the company decides to sell each T-Shirt for £7.50 or £5 each. What is their break-even point?

Calculating break-even point if selling price is £5:
Average Variable Cost per unit = Total Variable Cost / Total Number of Units manufactured
AVC = TVC /TNU
AVC = £2500 / 1000
AVC =  £2.50

Break-even point = TFC / (SP - AVC)
Break-even point = £500 / (£5 - £2.50)
Break-even point = £500 / £2.50
Break-even point = 200 units
Total revenue at break-even point will be (200 x £5.00) £1000


Calculating break-even point if selling price is £7.50:
Average Variable Cost per unit = Total Variable Cost / Total Number of Units manufactured
AVC = £2500 / 1000
AVC =  £2.50

Break-even point = TFC / (SP - AVC)
Break-even point = £500 / (£7.50 - £2.50)
Break-even point = £500 / £5.00
Break-even point = 100 units
Total revenue at break-even point will be (100 x £7.50) £750

Analysis
For the first calculation, to sell each T-Shirt at £5.00 each, 200 T-shirts has to be sold for the company to recover its fixed and variable cost. Also for the company to start generating profit, more then 200 T-shirts have to be sold and the sales revenue must be more than £1000

For the second calculation, to sell each T-Shirt at £7.50 each, 100 T-shirts has to be sold for the company to recover its fixed and variable cost.  Also for the company to start generating profit, more then 100 T-shirts have to be sold and the sales revenue must be more than £750

Click to see how to determine your selling price and how to calculate markup percentage

How to determine your selling price

You have bought your product and wish to determine what price to sell each without making a loss. One simple way of doing this is to use the following formula:

     Selling price = Variable Costs + Overhead Costs (Fixed Cost) + Profit

Variable costs are all the costs directly involved in the manufacturing and shipping or postage of your product while Overheads costs are all the costs involved in selling product

Example:
     All the costs involved in product                                     Amount in Pounds
     Manufacturing Cost /cost per unit inc P&P  (Variable cost)       60
     Administration cost                                     (Fixed cost)             6
     Distribution Cost                                        (Fixed cost)             6
     Promotional and selling cost                        (Fixed cost)             8
     Total Costs Price                                                                  80
     Profit margin                                                                           10
     Selling price                                                                          90

To calculate % Gross Profit Margin:
         % Gross Profit Margin = (Gross Profit Margin / Selling Price) x 100%
         % GPM = (£10/£90) x 100
        % GPM = 0.1111 x 100
        % GPM = 11.11%

To calculate % Markup:
        % Markup = (Selling Price - Cost Price) / Cost price * 100%
        % Markup = ( £90 - £80)/ £80 x 100%
        % Markup = £10/£80 x 100%
        % Markup = 12.5%

If % Markup is increased to 30%, then the new profit margin would be:
         New Profit Margin = Markup % * Cost Price
         New Profit Margin = 30% x £80
         New Profit Margin = £24

and the new selling price would be:
         New Selling Price = New profit margin + Cost Price
         New Selling Price  = £24 + £80
         New Selling Price = £104


Other ways of determining your selling price:

The following shows more ways of arriving at a selling price. The figures above and the formulas below will be used , we should arrive at the same selling price as above.

Selling Price = Cost Price + (Cost Price x % Markup)
      Selling Price = £80 + (£80 x (12.5/100))
      Selling Price = £80 + (£80 x 0.125)
      Selling Price = £80 + £10
      Selling Price = £90

Selling Price = Cost Price x (1 + % Markup)
     Selling Price =  £80 x (1 + (12.5/100))
     Selling Price = £80 x (1+ 0.125)
     Selling Price = £80 x 1.125
     Selling Price =  £90

Selling Price = Cost Price / (1 - Aspired Gross Profit Margin)
     Selling Price = £80 / (1 - 11.11/100)
     Selling Price = £80 / (1 - 0.1111)
     Selling Price = £80 / 0.8889
     Selling Price = £89.99
                            Approx £90


See how to calculate your Markup Percentage

How to calculate markup percentage

You've bought your product - it's in your warehouse or in storage somewhere but how do you decide what price to sell it for.  Markup percentage enables you set a price for your product based on the percentage profit you wish to gain. This type of pricing is called the cost based pricing or markup pricing.

For Instance:
1: You bought T-shirts at £0.50 each. You want a profit of 60% on each T-shirt when you sell them. Your selling price can be calculated by applying the following formula:

       Selling Price = (Markup % * Cost Price) + Cost Price
       Selling Price = (60% x £0.50) + £0.50
       Selling price = £0.30 + £0.50
       Selling Price = £0.80
This will be the selling price of the T-shirt


2: But if you already have a product that you are selling for £24 and you bought for £15. To calculate the Markup percentage for that product, apply the following formula:

       Markup = (Selling Price - Cost Price) / Cost price * 100%
       % Markup = (£24 - £15) / £15 x 100%
       % Markup = £9 / £15 x 100%
       % Markup = 60%
Your markup percentage is 60%

NB: 
Please note that this markup % has taken into account, an approximation of all your variable costs and overhead costs hence the high percentage used to make calculation.

Watch this video on how to calculate markup percentage

Math Lessons : How to Calculate Markup Percentages, by eHow

Click to read about how to determine your selling price that takes into account both variable and overhead costs.

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