What do we mean by break-even point and how does it differ internationally?

Break-even is the point at which revenue and total costs are the same, meaning the business is making neither a profit nor a loss. The break-even level of output informs a business of how many products it needs to sell to reach the break-even point (BEP).

Break-even is calculated as follows:  Break-even = fixed costs ÷ (selling price − variable costs)

The result of this calculation is always how many products a business needs to sell in order to break even. The calculation in brackets must be completed first.

Example. - A business that sells books at £10 a copy wants to find out when it will Break Even. Or where its BEPoint is.

Assuming their fixed costs are £400

And the selling price (per unit) is £10.

And the variable costs (per unit) are £6.

Therefore:  Break-even = £400 ÷ (£10 − £6)

= £400 ÷ £4

= 100       …. which means this business breaks even when it sells 100 Books.

Of course, this is a very easy example as we know it isn’t as straight forward as this especially when we’re talking about international trade.

In this article we’re going to look at the variables, and in some cases, the fixed costs that need to be taken into consideration when looking at the Break-Even Point for an international sale.

This list is not exhaustive as every sector or industry type has nuances that differentiate them, and this can only deal in generic terms.

The basic fixed costs stand for your exports as a proposition of the building, energy, staff and insurances will be applicable to your new market. However, there may be new costs that need to be allocated to this new market for example, your product may have needed to be registered or to have specific packaging designed that is compliant to the local or regional standards? What do you want to do with those costs?  This list will run through many of the issues that you may face as a business and some that might not have occurred to you.

Fixed costs might include:

• New packaging for the shelf to display or to demonstrate regulatory compliance for this new market. (Think about all those chocolate bars or hair shampoos that carry 6 languages) This is probably a cost for that market rather than a consignment.
• Any new head office staff that are brought in to work on this new market.
• New marketing expenditures that might impact on the costs i.e. brochures, Point of Sale materials or even staff to sell in the new market.
• Export Packing for the safety and security of the cargo whilst travelling.
• Insurance products for product liability or professional indemnity in the new market be especially careful with products or offerings that you’re selling in the USA & Canada.

Variable costs might include anything that is specific to that one sale or consignment such as:

• Freight is another variable cost that can be linked to the Incoterms® that have been agreed look carefully at what you have agreed as it is not just the main freight but the carriage to the terminal or port that can also impact on the costs and is definitely a variable cost associated with this consignment only.
• Specific cargo or in-transit insurance (this may become a fixed cost as you extend your activity in a new market)
• Bespoke packaging for a consignment only
• Production of paperwork this might be something your freight forwarder charges you for currently. (Again, this may become a contribution to fixed costs if a full-time person is employed to complete the appropriate papers.)
• Certificates of origin - these are normally generated by your chamber of commerce who certify the origin but, in some instances, they may need to be legalised by the relevant consulate within the new markets’ embassy.
• Local or fiscal taxes, the equivalent of our VAT in the UK will be charged in the country of destination. Some incoterms® take into account the obligation to pay the local taxes.
• Also, be aware of import duties at the place of delivery – again this is something that should be agreed at the time of contracting as these costs need to be allocated if payable by you as the exporter.
• Loading and unloading costs may impact too.
• Port charges/ demurrage
• Bank presentation charges depending on the method of payment agreed.

Check what you have agreed that the quotation covered these additional costs to ensure that any exporting you do is profitable and stress free. OpenBorders.Direct is here to help you to de-risk international trade leaving you to make a profit and grow your export markets.