Companies frequently perform a break-even analysis to determine how much of a product must be produced and sold to cover the expenses of being in business. While this is an important step in analyzing the feasibility of your business, a simple break-even calculation doesn’t disclose the percentage of the market share you must have to break even. If you take your calculation a couple steps farther, you can easily determine how much of the market your company must obtain to break even. This process strengthens your advertising, production and sales goals.
1. Determine your sales price per unit.
2. Determine your variable cost per unit. Variable costs include only the expenses directly associated with producing one product. If you produce zero units, you have zero variable expense.
3. Subtract your variable cost to produce one unit from your sales price for one unit. The result is your contribution margin per unit.
4. Calculate your fixed costs. Your business incurs fixed costs without regard to the number of units produced and sold. Fixed expenses include costs for items such as rent, insurance and utilities.
5. Divide your total fixed expenses by your contribution margin. The result is the number of units you must sell to break even.
6. Determine the number of units your industry sold within a specific time period to consumers. This calculation must include sales data from your competitors. Look at the financial statements of publicly traded competitors or speak with competitors directly to obtain sales information for your industry.
7. Divide the number of industry-wide units sold by the number of units your company must sell to break even. The result is the market share percentage required to break even.