Know-How Exchange : Research/Metrics

If you know the volume differences, then you would use weighted calculations. The response above was assuming you didn't know the volume differences between the products.

Normally, to calculate break even, you want to use the number that is closest to what is left when you take your sales price and subtract out all variable costs. The number left you then apply to the fixed costs. Let's say you have $1,000 left each month after paying all variable costs - then your break even period is 3 months.

What is a little confusing is that you listed all fixed costs as "labor/rent/etc", where direct labor (that used to manufacture your products) is normally considered a variable cost (but indirect labor, like administration, marketing, etc., is a fixed cost).

Check out this article - https://www.entrepreneur.com/article/0,4621,300279,00.html

I would suggest one of 2 calculations:

Use the mean average formlas given by koen.h.pauwels

OR

use the quotient his #1 suggestion (240 t-shirts): take the average cost (eg 6.5) and price (19), and calculate total break-even volume as: 3000/(19-6.5) = 240 T-shirts.
THEN, take 240 / 27 in order to get the mean price (8.88) you need to make get per shirt to break even.

Did I just state the same thing? Now I'm confused...LOL

OK, I found it. Here is the link and the quote:


https://www.entrepreneur.com/article/0,4621,300279,00.html



"...formula for calculating the breakeven point: breakeven = fixed costs /gross margin percentage, where fixed costs are recurring monthly expenses that do not vary with sales (such as rent, salaries and so on) and gross margin percentage of a product means its profit divided by its price.

That simple calculation assumed a one-product company; therefore, it was easy and straightforward to determine the gross margin of a particular product. However, the calculation gets a little more complex when you throw additional products into the mix. The answer to your question lies in the calculation for computing the gross margin for multiple products. The breakeven calculation itself does not change.

Instead of using the simple gross margin percentage, you must compute the "weighted average" gross margin percentage, which is calculated as the sum of the gross margin percentage for each product multiplied by its percentage of sales. Returning to your example, the chair has a gross margin of 50 percent: (50-25) /50. The stool has a gross margin of 60 percent: (50-20) /50. 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:

* 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. To calculate the unit sales of each product, 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




From the above example, we can see how changing the sales mix can affect the breakeven point. For example, if the above firm were to sell 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 firm where 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. "