Introduction
Calculating the break even point in naira is an important step in understanding the financial health of your business. It is the point at which your total revenue equals your total costs, and you start making a profit. In this article, we will guide you through the process of calculating the break even point in naira.
Gather Data
The first step in calculating the break even point is to gather all the necessary data. This includes fixed costs, variable costs, and the selling price of your product or service.
Fixed costs are the expenses that do not change with the level of production or sales. These include rent, salaries, and insurance. To calculate fixed costs, add up all the expenses that remain constant regardless of how much you sell.
Variable costs are the expenses that change with the level of production or sales. These include raw materials, packaging, and shipping. To calculate variable costs, multiply the variable cost per unit by the number of units sold.
The selling price is the amount of money you charge for each unit of your product or service.
Identify Fixed Costs
To calculate the break even point in naira, you need to know your fixed costs. These are the expenses that remain constant regardless of how much you sell. Examples of fixed costs include rent, salaries, and insurance.
To calculate your fixed costs, add up all the expenses that remain constant. This includes both direct and indirect costs. Direct costs are expenses that are directly related to the production of your product or service. Indirect costs are expenses that are not directly related to the production of your product or service, but are necessary for running your business.
Determine Variable Costs
Variable costs are the expenses that change with the level of production or sales. Examples of variable costs include raw materials, packaging, and shipping.
To calculate your variable costs, multiply the variable cost per unit by the number of units sold. This will give you your total variable costs.
Calculate Contribution Margin
The contribution margin is the amount of money you have left over after you deduct variable costs from the selling price. To calculate the contribution margin per unit, subtract variable costs per unit from the selling price per unit.
The contribution margin is an important concept because it tells you how much money you have left over to cover your fixed costs and make a profit.
Determine the Break Even Point
The break even point is the level of sales at which you cover all your costs and start making a profit. To calculate the break even point in units, divide fixed costs by the contribution margin per unit. To calculate the break even point in naira, multiply the break even point in units by the selling price per unit.
For example, if your fixed costs are ₦100,000 and your contribution margin per unit is ₦500, your break even point in units is 200 units (₦100,000 ÷ ₦500). If your selling price per unit is ₦1,000, your break even point in naira is ₦200,000 (200 units x ₦1,000).
Check Your Results
Once you have calculated the break even point in naira, check your results to see if they make sense. If your break even point is too high, you may need to increase your selling price or reduce your costs. If your break even point is too low, you may need to increase your production or sales.
Adjust Your Strategy
Based on your break even point analysis, you may need to adjust your business strategy. This could include rethinking your pricing strategy, finding ways to reduce costs, or increasing your marketing efforts to boost sales.
Conclusion
Calculating the break even point in naira is a crucial step in understanding the financial health of your business. By following these steps, you can determine the level of sales you need to cover all your costs and start making a profit. Use this information to adjust your business strategy and make informed decisions about your pricing, production, and sales.
