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Definition of ‘Break Even’
The break-even point is achieved when your business is producing enough revenue each month to cover all your fixed and variable costs.
By using the break-even point within your company, it will enable you to understand the level of production you need to attain and what price you need to sell at in order to ensure that you make a profit. There is a well known business quotation – ‘Turnover is vanity, profit is sanity, cash flow is king’
If you are making a low level of sales at a low price, this is acceptable provided that you include the costs of developing / manufacturing the unit.
For example:-
If you are producing 1000 Widgets & have fixed costs of £750 & variable costs of £1 per unit, your cost will be £1,750 (1000 x 1 + 750).
If you set your sale price at £3 per unit & only sell 500 units, your revenue will be £1,500, a loss of £250.
If you set your sale price at £3 per unit & sell 1000 units, you will make £3,000 from selling those units, a profit of £1,250.
Your break-even point will be your total units sold covering your fixed and variable costs to manufacture the units. In this example, you would need to sell around 584 units to reach your break-even point – 584 x £3 = £1,752.
Break-even analysis
A break-even analysis is a useful tool when you are setting a price. It enables you to determine how many products you must sell and at what price in order to make a profit.
What is the impact on break-even when exporting?
Before starting to export, it is important to understand what your domestic unit price is, as when exporting overseas you will inevitably incur additional costs, both direct & indirect.
The starting point when negotiating an export contract, whether you are new to export or an inexperienced exporter, is to agree on the Incoterm that will apply to the contract.
Incoterms® 2020 - ICC – International Chamber of Commerce
Incoterms, published by the ICC – International Chamber of Commerce, a widely-used term of sale, is a set of 11 internationally recognised rules which define the responsibilities of sellers and buyers. Incoterms specifies who is responsible for paying for and managing the shipment, insurance, documentation, customs clearance, and other logistical activities.
The current version Incoterms® 2020 came into effect on 1st January 2020, the changes to the previous version Incoterms® 2010 will be covered in a future article.
It is very important that the sales & finance functions liaise closely with each other when negotiating the Incoterm, as the impact on break-even as a result of additional export related costs can have a serious impact on profitability.
For example – an exporter negotiating a contract on FCA (‘Free Carrier’) terms, under the Incoterms® 2020 rules is responsible for loading the goods on the buyer’s transport at the seller’s premises , or the seller delivers the goods to another named place named in the contract.
Whereas a contract under DDP (‘Delivered Duty Paid) terms requires that the supplier is responsible for paying all costs associated with the delivery of goods right up until they get to the named destination place.
Additional costs when exporting
New direct costs include:-
New indirect costs include:-
Goods specific direct costs
In conclusion, as demonstrated above, the export unit price will inevitably be higher than the domestic unit price, which your export unit price will need to reflect.
