By Dexter Webster, CEO, dTc Advisory
Many small businesses struggle with the decision to purchase new services that will generate revenue through marketing and promotion solutions or reduce costs through business consulting & automation of operations. To properly make this decision, business owners must understand the fixed costs (FCs) and variable costs (VCs) associated with the purchasing of any service/product and how it will either increase sales or reduce costs. TheFC & VC are part of the Break Even (BE) formula along with unit sales price (USP). TheBE formula enables a business to identify the number of units that must be sold to recover all costs associated with the selling of a product/service.
The BE formula can be written as: BEU = FC/(USP – VC).
- FC = $500; the monthly fee for the service
- VC = $10; includes all costs per unit to include: selling, production, fulfillment, fees & etc
- USP = $30; the price of the unit (service/product)
- BEU = Number of units to be sold in order to recover all costs
- For this example, this is a monthly calculation based on the information stated above
Now, let’s work through the example. Using BEU = FC/(USP-VC) by plugging in the values as: BEU = 500/(30-10) = 500/20 = 25. In order to pay for the $500 a month service, you must sell 25 units monthly at $30 price per unit & $10 variable cost per unit. We can check the work by laying out the numbers.
- FC = $500
- VC = $10 * 25 = $250
- Total Cost = FC + VC = $500 + $250 = $750
- Revenue = $30 * 25 = $750
- BE = Revenue – Costs = $750 – $750 = 0
Hopefully, this information will help you assess the value of a new product or service pitched to help your business grow. We are available to help you through this process. Contact Us Today! http://bit.ly/dTcContactUs
Dexter Webster, a proud Howard University graduate with a BBA in Information Systems and MBA in General Management/Strategy, leads the day-to-day operations for dTc. Dexter has extensive experience in operations, customer service, technology, product and management consulting working for Fortune 100 companies. Dexter is responsible for developing strategic partnerships, and representing dTc externally. He can be reached at info@dtcadvisory.com.
Newsletter Signup
Join our email list to stay connected.
You must be logged in to post a comment Login