As an E-commerce seller, it’s important to know the minimum number of products you need to sell in order to hit the point where your venture is neither making profits nor losses. This is the break-even analysis.
The break-even point is calculated by dividing the Fixed Costs by the difference between Selling Price Per Unit and the Variable Costs Per Unit.
Break-Even Point = Fixed Costs^ ÷ (Selling Price Per Unit – Variable Cost Per Unit^)
Fixed Costs^ are costs that will not change no matter how many products are sold. Examples of fixed costs are rental, insurance premium, property taxes and interest expense.
Variable Cost Per Unit^ are costs directly related to the manufacturing of a product. They increase when your sales volume grows. Examples of variable costs are labor and materials used in the production, as well as hourly wages, sales commissions and platform transaction fees.
Here is an example to illustrate the break-even point.
Jacky’s Electronic manufactures multi-usage vacuum cleaners. He wants to find out the impact the sale of this vacuum cleaner will have on his company’s financials. Hence, he calculates the break-even point of selling the vacuum cleaner:
Fixed Costs = $10,000 Selling Price = $250 Variable Cost = $130
BE = $10,000/($250 - $120) = 83.33
Jacky needs to sell at least 84 units of the multi-usage vacuum cleaners before his company makes any profit.
From this illustration, we learn that break-even point is important because it sets your sales goals as you will have in mind a target number of units to sell. In addition, it’s clear that the break-even point helps you in identifying the right price for your products. In other words, break-even analysis determines your profitability level.