Creating Your Forecasted Breakeven Analysis
After completing your Financial Budgets (step 1), your First Year Forecasted Cash Flow Statement (step 2), your First Year Forecasted Income Statement (step 3), your First Year Forecasted Balance Sheet (step 4), and your First Year Forecasted Ratios (step 5), the next step is to develop your First Year Forecasted Breakeven Point (remember to create your forecasted financial statements and analysis one year at a time).
Recall from previous discussions, a Breakeven Analysis, in its simplest form, is a tool used to determine the level of sales a business must earn in order to achieve neither a profit nor a loss. In other words, the Breakeven Analysis determines the number of units or products a company must sell in order to achieve a Net Income of ZERO (revenues  expenses = $0.00).
The formula used to calculate your Breakeven Point is as follows:
Breakeven in Units = F ixed Costs
Selling Price per unit  Variable Costs per unit
Notice three (3) components are required in the formula; namely, Selling Price per unit, Variable Costs per unit, and Fixed Costs.
Your Selling Price per unit is the price you plan to sell your product for. If you plan to sell more than one type of product, you will be required to determined a Weighted Average Selling Price. The weighted average selling price would, in turn, be used in the formula to determine the Breakeven Point. At any rate, you should have already determined your selling price per unit or weighted average selling price in Budget 1 entitled "Determining Your Selling Price and Product Cost (per unit)".
Recall from our example that Murray plans to sell each diskette (unit) for $26.00 in 200X and $24.00 in 200Y. As a result, his $26.00 selling price per unit will be used in the formula to calculate his 200X Breakeven Point, while his $24.00 selling price per unit will be used in the formula to calculate his 200Y Breakeven Point. (Please Note: the Selling Price, used in the breakeven formula, MUST be valued on a per unit basis).
Variable Costs are costs or expenses that fluctuate with production or sales. The most common variable cost is a company's Total Product Cost per unit. A retailer or service provider's Total Product Cost per unit simply consists of the cost to purchase each product and the cost to ship each product to the company's place of business. A manufacturer's Total Product Cost per unit consists of the cost to purchase enough raw materials to make one finished product, the cost to ship the raw materials to the manufacturer's place of business, the cost of direct labor needed to make one finished unit, and factory overhead to make one finished unit.
If you plan to sell more than one product, you will be required to determine a Weighted Average Product Cost. The weighted average product cost would, in turn, be used in the formula to determine the Breakeven Point.
At any rate, a retailer or service provider would have already determined its Total Product Cost per unit OR its Weighted Average Product Cost in Budget 1 entitled "Determining Your Selling Price and Product Cost (per unit)".
A manufacturer, on the other hand, would use Budget 1 entitled "Determining Your Selling Price and Product Cost (per unit)", Budget 4 entitled "Developing Your Direct Manufacturing Labor Budget", and Budget 5 entitled, "Developing Your Manufacturing Factory Overhead Budget" in order to determine its Total Product Cost per unit OR its Weighted Average Product Cost.
Recall from our example, Murray's total cost to purchase each diskette (unit) and have it shipped to his place of business (IE Total Product Cost per Unit) is expected to be $3.00 in 200X and $3.30 in 200Y. Since Murray's Total Product Cost is considered his only Variable Cost, $3.00 will be used in the formula to calculate his 200X Breakeven Point and $3.30 will be used in the formula to calculate his 200Y Breakeven Point. (Please Note: the Variable Cost used in the breakeven formula MUST be valued on a per unit basis.
Fixed Costs are costs or expenses that do NOT fluctuate with production or sales. Most companies consider each Operating Expense a Fixed Cost (IE all marketing & administrative expenses are considered fixed costs). Unlike, the selling price and the variable cost, the breakeven formula does NOT require Fixed Costs to be calculated on a per unit basis. Therefore, in most cases, companies can simply refer back to Budget 9 entitled "Developing Your Operating Expense Budget" for their Fixed Costs.
Below summarizes Murray's Operating Expenses and hence, his Fixed Costs.
200X 
200Y 

Total Marketing Expense  $37,998  $48,998 
Total Administrative Expense  $46,173  $92,100 
Total Operating Expense/Fixed Costs  $84,171  $141,098 
As you can see, Murray's Total Fixed Costs for 200X and 200Y is forecasted at $84,171 and 141,098 respectively. As a result, his $84,171 in Fixed Costs will be used in the formula to calculate his 200X Breakeven Point and his $141,098 in Fixed Costs will be used in the formula to calculate his 200Y Breakeven Point.
Now Murray has enough information to calculate his Forecasted Breakeven Point for 200X and 200Y.
Scholarship Information Services
Breakeven Point
For Years 200X and 200Y
Breakeven in Units = F ixed Costs
Selling Price per unit  Variable Costs per unit
200X 200Y
___Total Fixed Costs______ = $84,171 $141,098
Selling Price  Variable Costs $23.00 $20.70
Breakeven in Units per Year = 3,660 units 6,816 units
Therefore, Murray must sell 3,660 diskettes (units) in 200X in order to breakeven. Said another way, Murray must sell 3,660 diskettes in order to achieve a Net Income Before Taxes of $0.00. Each unit sold above the Breakeven Point in 200X will produce a full profit of $23.00 (selling price per unit  variable cost per unit). Therefore, if in 200X Murray sells 1,000 units above his breakeven point or 4,660 diskettes (IE 3,660 +1,000 = $4,660 diskettes), he would have a Net Income Before Tax of $23,000 (1,000 diskettes x $23.00 made from each diskette sold).
In 200Y, Murray must sell 6,816 diskettes (units) in order to breakeven. Said another way, Murray must sell 6,816 diskettes in order to achieve a Net Income Before Taxes of $0.00. Any unit sold above the Breakeven Point in 200Y will produce a full profit of $20.70 (200Y's selling price per unit  200Y's variable cost per unit). Therefore, if in 200Y, Murray sells 1,000 units above his breakeven point or 7,816 diskettes (IE 6,816 +1,000 = $7,816 diskettes), he would have a Net Income Before Tax of $20,700 (1,000 diskettes x $20.70 made from each diskette sold during 200Y).
Below summaries the Budgets that need to be completed before you can develop your Forecasted Breakeven Point.
Budget Name  Required to Determine Your Forecasted 
Determine Your Selling Price  Selling Price per unit for each year 
Determine Your Total Product Cost  Total Product Cost per unit for each year 
Operating Expenses Budget  Total Operating Expenses per year (fixed costs) 
Once again, if you plan to sell more than one type of product, you will be required to calculate a weighted average selling price and a weighted average product cost. These weighted averages will then be used in your Breakeven Formula (shown below).
Breakeven in Units = F ixed Costs
Selling Price per unit  Variable Costs per unit
Additional Forecasted Breakeven Point Example:
For additional information on the Breakeven Point, please refer to the section entitled "Breakeven Analysis".