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8.2 Break Even Point Analysis

Anthony, Christine and Sofia of Spotless Homes are calculating the breakeven point in terms of the number of customer transactions it will take for them to cover the fixed costs of operating their business. Here is how this is being arrived at:

Each operating expense for the year is listed and then the amount of that percentage that is fixed is allocated.

  1. The only operating expense that is not taken into account for this calculation is depreciation since it is a non cash expense.
  2. Thus the operating expense for 2015 without the depreciation, gross wages and employer taxes comes up to be $43,900.
  3. The fixed component of that expense comes up to be $26,594 or roughly 60%.
  4. The average cost for the typical customer transaction for each cleaning job is estimated to be $125
  5. Since there is no cost of goods sold associated with the production of the service, we come up with a gross margin of 100%
  6. The fixed operating expense divided by the $125 per transaction yields us a 213 transactions.
  7. Thus we are estimating that Spotless Homes will have to have a minimum of 213 transactions in 2015 just to pay the bills and come out flat - this is also before they owners
  8. take a single dime out of the business to pay themselves.

In our sales projections we are estimating that even in a slow market environment the firm will be able to accomplish the following in sales:

  1. In 2015, if the market is slow, it is estimated that Spotless Homes will be able to successfully close on 480 transactions bringing in $187,500 in sales.
  2. Likewise in 2016, given a slow market, the firm expects to serve 1,667 customers successfully thereby generating $225,000 in sales; and finally
  3. In 2017, even in a slow market, it is expected that Spotless Homes will close 1,810 transactions generating $262,500 in sales.

Thus we can say with confidence that Anthony, Christine and Sofia will be able to meet and exceed their break even points in each year and slowly but surely build a successful business in Cobb county, Georgia.

Quick Links:

  1. Go to the Corresponding Template section for this industry.
  2. Go to the Corresponding Questionnaire section for this industry.

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