Calculating Breakeven Ratios & Profit Margins in Binary Options

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Break-Even Calculator

Use this calculator to easily calculate the break even point for any product or service. Estimate how many units you need to sell before you break even, covering both your fixed and variable costs, and how long it would take you.

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Break-even formula

When operating a business, one of the most important analytical tools you will come to use is the break-even analysis. The B/E point is a metric that shows you how much sales you need to reach before you begin realizing profit. In other words, it is the moment when your total costs are finally covered by your total revenue. [1]

Our break-even calculator is a useful tool to refer to when determining prices for the goods and services you offer, deciding on budgets or simply working on a business plan.

The break-even analysis relies on three crucial aspects of a business operation – selling price of a unit, fixed costs and variable costs. Your fixed costs are not influenced by the amounts you sell. A fixed cost, for example, is your rent. On the other hand, variable costs are largely dependent on the volume of work at hand – if you have more clients, you will need more labor, which equals a rise in variable expenses.

Having information about all three of these aspects, you can calculate your break-even point using the formula:

Break-even point measured in units = Total fixed costs / (Selling price of a unit – Variable costs per unit).

In this case, you estimate how many units you need to sell, before you can start having actual profit. The fixed costs are a total of all FC, whereas the price and variable costs are measured per unit.

However, if you want to calculate your break-even point in a purely financial expression, you can go with this formula:

Break-even point measured in $ = Total fixed costs / Contribution margin ratio,

where the contribution margin ratio is equal to the contribution margin divided by the revenue.

Another way to estimate the break-even point in dollars is to refer to the one in units:

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Break-even point measured in $ = Selling price of a unit x Break-even point measured in units.

Finally, we will look at the formula that helps you calculate how many units you have to sell in order to reach your desired profit:

Number of sold units that provide the desired profit = Desired profit / Contribution margin per unit + Break-even point measured in units.

This is a step further from the base calculations, but having done the math on BEP beforehand, you can easily move on to more complex estimates. We use the formulas for number of units, revenue, margin, and markup in our break-even calculator which conveniently computes them for you.

How to calculate the break-even point?

The break-even point is an extremely important starting goal to work towards. No matter whether you are a business owner, accountant, entrepreneur or even a marketing specialist – you will often come across this metric, which is why our online break-even calculator is so handy.

However, it might be too complicated to do the calculation, so you can spare yourself some time and efforts by using this Break-even Calculator. All you need to do is provide information about your fixed costs, and your cost and revenue per unit. To make the analysis even more precise, you can input how many units you expect to sell per month.

The algorithm does the rest for you – it automatically calculates your profit margin and markup, and your break-even point both in terms of units sold and cash revenue. If you have specified your sales expectations, you will even see how much time it will take to reach the BEP.

Calculating the break-even point helps you determine how much you will have to sell before you can make profit. Knowing this, you can then regulate your marketing activity if you decide your sales are lower than expected, or just wish to reach the target sooner. This analysis can also serve as a much needed advisor on cutting costs and fixing selling prices.

Having a successful business can be easier and more achievable when you have this information. It makes the difference from operating at a loss to achieving financial goals and expanding production.

Breaking even – practical examples

Now, let’s go through the break-even analysis step by step to illustrate its usefulness with a real-life example.

Michael is the owner of a brand new pizza shop. He is uncertain whether his venture will be successful and wants to know how long until it is profitable. He has estimated his total fixed costs to amount to $10,000, while the variable cost per unit is $2.50. He sells a slice of pizza for $3.90. Let’s now calculate the break-even point:

Break-even point measured in pizza slices sold = 10,000 / (3.90 – 2.50) = 10,000 / 1.4 = 2,564.

It looks like Michael will have to sell 2,564 slices before he can start profiting from his business. In dollars that is:

Break-even point measured in $ = 3.90 x 2,564 = 9,999.6.

By doing the math manually or via using our break even calculator, Michael now knows that he needs to sell about $10,000 in pizza slices before he can realize a profit for himself.

References

[1] Levine D., Boldrin M. (2008) “Against Intellectual Monopoly” Cambridge University Press

Exercise-5 (CM ratio, break-even analysis, target profit analysis, margin of safety)

Following is the contribution margin income statement of a single product company:

Required:

  1. Calculate break-even point in units and dollars.
  2. What is the contribution margin at break-even point?
  3. Compute the number of units to be sold to earn a profit of $36,000.
  4. Compute the margin of safety using original data.
  5. Compute CM ratio. Compute the expected increase in monthly net operating if sales increase by $160,000 and fixed expenses do not change.

Solution:

(1) Break-even point in units and dollars:

Fixed expenses/Unit contribution margin

(12,500 units × $80) = $1,000,000

(2) Contribution margin at break-even point:

Contribution margin must be $300,000 at break-even point because it will cover fixed costs and nothing will remain to go towards profit.

(3) Computation of target profit:

(Fixed expenses + Target profit)/Unit contribution margin

Company must sell 14,000 units of product to earn a target profit of $36,000.

(4) Margin of safety in dollars and percentage:

Margin of safety in dollars = Actual or budgeted sales – sales required to break-even

Margin of safety in percentage = Margin of safety in dollars/Actual or budgeted sales

(5) CM ratio and expected change in net operating income:

Contribution margin/Total sales

If the sales are increased by $160,000 without any change in fixed expenses, the net operating income will be increased by $48,000 as computed below:

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Break-Even Analysis: How to Calculate Break-Even Point for a Restaurant

By: Casey Woo

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You might be an expert in management, staff training, and menu engineering. But do you know how to calculate break-even point for your restaurant?

Not all restaurateurs are business experts right out of the gate, and that’s okay. What matters is the willingness to learn. Once you have a reliable system in place for calculating your break-even point, getting back to your true passion will be all the easier.

Break-even point is a key figure in operating your restaurant, referring to the amount of revenue necessary to cover the total fixed and variable expenses incurred within a specified time period.

Some methods of calculating break-even point can be quite subjective. Our hope with this article is to help define some standard restaurant accounting metrics, shine a light on why they matter to you, and help you figure out how to start tracking them today.

How to Calculate Break-Even Point for Your Restaurant

Break-even analysis can be challenging for restaurants: You’re measuring today’s business performance with tools and information based on historical accounting data from the past.

Your break-even point helps you understand how many people — based on a determined average price point per guest — your restaurant needs to serve in order for the business to make money. To do this, it’s important to conduct accurate cost accounting; it’s also important for your restaurant POS system’s sales reporting to deliver accurate data on guest averages.

Break-even analysis also focuses on making sense of your fixed and variable costs. Here’s a breakdown of the two.

Fixed Costs

Your fixed costs include expenses that must be paid regardless of production or sales volume. A great way to distinguish between fixed and variable costs is to ask yourself, “What expenses do I still have to pay, even if I don’t get a single customer?”

A few common fixed costs include:

Heating the ovens and powering the walk-ins

Occupancy expenses like rent, insurance, and property tax

Communication tools like a phone system and internet

Variable Costs

Variable costs vary in proportion to production. Your variable costs also take into consideration anything that gets more expensive as a result of more business. Variable costs may include:

Food and drink costs

Disposables and garbage bags

Credit card processing fees

Mixed Costs

It’s worth mentioning mixed costs, which are costs that waiver between being fixed and being influenced to a degree by factors like sales volume.

For the purpose of calculating break-even point, mixed costs are often grouped with fixed costs. An example of a mixed cost is power and water, which may vary month-to-month but typically doesn’t drift too far from the norm.

Free Resource: How to Measure and Increase Restaurant Sales

Break-Even Point Formulas and Calculations

Here is the textbook formula for calculating break-even point in units of number of guests for a given period of time:

Break-Even Point = Total Fixed Costs ÷ (Average Revenue Per Guest – Variable Cost Per Guest

In the restaurant industry, the units are the guest counts (or number of “covers”) themselves. Our unit price is essentially the dollar amount of our “guest average.” This isn’t always the easiest way to look at things, and that’s mostly because of the difficulty in obtaining the “variable cost per guest” component.

Some restaurants will have worked out their estimated margins on food and drinks based on an expanded analysis of recipes and cost of ingredients. But most restaurants don’t have an entire chart of accounts neatly categorized into fixed and variable costs in order to accurately conduct complete break-even analysis.

As an alternative, this variation of the formula works well. You only need three values: total sales, total fixed costs, and total variable costs:

Break-Even Point = Total Fixed Costs ÷ (Total Sales – Total Variable Costs ÷ Total Sales)

Once you’ve categorized your fixed and variable costs for a given period of time, this formula allows you to quickly calculate your restaurant’s break-even point in sales dollars. All you have to do is gather basic accounting reports from a high level, without yet factoring in guest counts or the dollar averages per guest.

Let’s break this down a bit to see how we got to this.

You can think of break-even point in dollar amounts like this: For a given period of time, at what sales volume did my total contribution margin break-even my bottom line, offsetting my total fixed costs, after which point each additional dollar earned went straight to contributing to my net income?

Let’s see how you calculate the percentage of each sales dollar that is available to cover your fixed costs and profits using this formula: Break-Even Point = Total Fixed Costs ÷ Contribution Margin Ratio. We can get to this using a series of calculations:

Contribution Margin = Total Sales – Total Variable Costs

Contribution Margin Ratio = Contribution Margin ÷ Total Sales

Contribution Margin Ratio = (Total Sales – Total Variable Costs ÷ Total Sales)

Break-Even Point = Total Fixed Costs ÷ (Total Sales – Total Variable Costs ÷ Total Sales)

With this formula, we simply remove the guest count component to answer the question, “At what point did I break even and start adding profit to my bottom line?”

Let’s look at an example. Last quarter, let’s say you…

Introduced a new menu and slightly raised prices

Printed new menus, which only happens a few times a year

Started using new vendors that you negotiated into contract pricing

Brought on a new restaurant management team

Invested in a new kiosk system, costing you a fixed monthly amount but saving you money on labor

Knowing this information, we should use the last three months of accounting data to reset our way of measuring break-even point. It’s a good idea to use a moving average of these expenses and sales figures. Using moving averages allows you to account for the quirks of all the miscellaneous expenses that still impact your bottom line, while still updating your historical numbers with the most recent month’s closing figures.

Let’s look at these example statistics from a restaurant’s last quarter:

The restaurant had $450,000 in sales.

Their total variable costs amounted to $180,000.

Their total fixed costs amounted to $200,000.

Now, let’s turn these costs into one-month averages:

On average, the restaurant had $150,000 in sales per month.

On average, the restaurant had $60,000 in variable costs per month.

On average, the restaurant had $66,666 in fixed costs per month.

With these numbers, we’ll first subtract the number of total variable costs ($60,000) from total sales ($150,000). Next, we divide that difference ($90,000) by the total sales number ($150,000). Then, we take one minus that quotient (0.4), which equals 0.6. Finally, we divide the total fixed costs ($66,666) by 0.6.

Ready to see it all made clear? Using this example, let’s crunch some numbers to see how to calculate break-even point in dollars:

Break-Even Point = Total Fixed Costs ÷ (Total Sales – Total Variable Costs ÷ Total Sales)

Break-Even Point = $66,666 ÷ ($150,000 – $60,000 ÷ $150,000)

Break-Even Point = $66,666 ÷ ($90,000 ÷ $150,000)

Break-Even Point = $66,666 ÷ 0.6

Break-Even Point (in Dollars) = $111,110

In this example, we calculated that the restaurant’s break-even point was when it reached an average of $111,110 in sales per month.

Let’s say you discovered from your sales records that the average dollar amount per guest for the same previous three months is $45. You can use that number to determine your break-even amount when it comes to the number of guests you need per month. All you need to do is divide your monthly break-even amount by the average amount spent per guest.

Break-even point (in guests) = $111,111 ÷ $45

Break-even point = 2,469 guests

Comes out to an average of 83 guests per day

There you have it. We hope these formulas and breakdowns help you better understand how to calculate break-even point for your restaurant.

Crunching the Numbers for Your Restaurant

While it’s crucial to understand the fundamentals of break-even analysis for your restaurant, there are still plenty of other metrics you should be thinking about on a regular basis, including food cost percentage and cost of goods sold. Download a free copy of our restaurant metrics calculator — including an interactive template — for easily calculating your restaurant’s metrics.

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