Activity

USS Biz Trek Activity # 26: Break-even Point

One of the easiest ways to start a business is to buy a product wholesale and sell it retail. When you buy wholesale, the common business practice for young entrepreneurs is to double the cost of goods (the wholesale price per unit) to find the retail price. That means you will make 50% profit on every sale. This practice of doubling the cost of goods to reach the sales price is known as keystoning.

Notice how the keystoning principle works in the following example of a necktie business, then study the steps used to calculate the break-even point for this same business. Then use this example as a pattern to figure your break-even point.

Step 1: Figure the cost of goods on one unit of your product. (One necktie costs $5.)

Step 2: Double the cost of goods to get the sales price. (Each necktie retails for $10.)

Step 3: Figure the gross profit per unit. Gross profit means total profit before operating expenses are deducted. (Gross profit on each necktie is $5.)

Step 4: Estimate your total monthly operating expenses by adding up the monthly cost for advertising, rent, office supplies, phone, and any other bills you pay. Cost of goods is not included. (For example, estimate your operating expense is $50.)

Step 5: Divide your total estimated operating expense by the gross profit you make on every sale. ($50 operating expense divided by $5 gross profit on each sale.)

Step 6: The result is the number of units you must sell each month to reach the break-even point. ($50 divided by $5 = 10) You must sell 10 neckties every month to reach the break-even point.

Loggin’ On

Now open your USS Biz Trek log and create a new page titled "Break-even Point." Use the steps in this example to figure the break-even point for your business. Is the resulting number of sales realistic, or do you need to make adjustments? Look for ways to save money on expenses and keep adjusting the figures until you feel you have set a break-even goal that is reachable.

Finished?

Rocket back to Lesson 8

Rocket forward to Activity 27