To determine how many units must be produced and sold to break-even, use the following formula:
(Fixed Costs) / (Unit Contribution Margin)* = Number of units needed to
* Unit Contribution Margin = Selling Price per Unit - Variable cost per unit
Calculating Break-Even Number of Units
The unit produced in this example is one hour of consulting. In this example, the number of hours required just to cover costs is 2,000.
$30,000 / ($30 - $15)
= 2,000 units (hours per year)
If you assume consulting hours are spread out evenly over a 50-week work year, 40 hours must be billed and collected each week just to break-even.
2,000 hours per year / 50 weeks = 40 hours per week
With 40 hours of consulting per week by one person, the business only breaks even. Unless that person can consult additional hours to make a profit while marketing the service and managing the requisite paperwork, this business cannot turn a profit. Since this is highly unlikely, this model does not appear to be a realistic pricing model.
Let's play around to see what the company's options might be. If we raise the hourly rate from $30 to $35 per hour, we find that the break-even revenue figure drops from $60,000 to approximately $52,500.
$30,000 / (1 - ($15/$35)) = $52,500
Also, the number of hours per week required to cover costs drops from 40 to 30 per week.
$30,000 / ($35 - $15) = 1,500 hours per year
1,500 hours per year / 50 weeks = 30 hours per week
It still might be a challenge for one consultant to work 30 hours a week because they need time for researching, learning, administrative duties, and breaks. Also, it might be difficult to sell 30 hours of consulting consistently every week. Even if these challenges are overcome, the business is still only breaking even. A profit needs to be made
Example: Try Again
At a rate of $50 per hour, the number of hours required per week to cover costs drops to an attractive 17, which is a more realistically achievable number in terms of sales and staffing.
$30,000 / ($50 - $15) = 857 hours per year
857 hours per year / 50 weeks = 17 hours per week
Also, the revenue needed to break-even drops to $42,857.
$30,000 / (1 - ($15/$50)) = $42,857
So the price floor range for this business is $35-$50 per hour just to cover costs. (The range is dependent on how many hours can actually be offered and sold. It's up to the entrepreneur to judge how realistic profit expectations are and to price accordingly.)