NDSU Extension Service - Ramsey County

Accessibility


| Share

When Do I Start Making Money

When Do I Start Making Money?

 

If you own a business, are thinking of starting a business, have a hobby where you occasionally sell items you’ve made or are considering marketing your own special version of salsa, you have definitely wondered when your income would be more than your expenses. That point when you begin generating income is known as a break-even point.

A break-even point defines when an investment will generate a positive return.

Break-even analysis is a useful tool to study the relationship between fixed costs, variable costs and returns. Break-even price analysis computes the price necessary at a given level of production to cover all costs. To explain how break-even analysis works, we need to first define the cost items.

 

Fixed costs, incurred after the decision to enter into a business activity is made, are not directly related to the level of production. Fixed costs include, but are not limited to, depreciation on equipment, interest costs, taxes and general overhead expenses such as lights and heat.

 

Variable costs change in direct relation to volume of output. They may include cost of goods sold or production expenses such as labor and power costs, packaging, fuel and other expenses directly related to the production of a commodity or investment in a capital asset. Total variable costs (TVC) are the sum of the variable costs for the specified level of production or output. Average variable costs are the variable costs per unit of output or of TVC divided by units of output.

 

The total cost line is the sum of the fixed costs and variable costs.

 

The main advantage of break-even analysis is that it points out the relationship between cost, production volume and returns. It can be extended to show how changes in fixed cost-variable cost relationships, in supply prices, or in revenues, will affect profit levels and break-even points.

 

Break-even analysis is best suited to the analysis of one product at a time. It can be used to determine the lowest amount of business activity necessary to prevent losses – in other words, the break even analysis for your special salsa might show that unless you sell 575 jars each month, your costs are more than your income and you will actually lose money no matter how much time you spend in the kitchen.

Creative Commons License
Feel free to use and share this content, but please do so under the conditions of our Creative Commons license and our Rules for Use. Thanks.