Break Even Analysis

Break Even Analysis

In our October 2017 Newsletter we discussed calculations of break
even analysis when purchasing a new asset.

Break even analysis can also be used when deciding to incur
additional costs. For example if the cost of employing a new
staff member will be $70,000 (consider all costs including ACC,
leave, KiwiSaver).

If gross profit is around 50% sales will need to increase by $140,000 to
cover the cost of the new employee.
It could be that orders are not being completed on time and customers are getting frustrated. For a company with $800,000 of annual sales, if they can retain 10% of their annual sales through improved customer service they will retain $40,000 of gross profit ($800,000 x 10% x 50% gross margin).

If the new employee can further assist to improve the annual gross profit by 2% (say $16,000 per year) they have contributed a total of $56,000 towards the annual costs of employment. In addition if they have been able to free up some of the owner’s time to work on the business this could further justify the cost.

For further information see our October 2017 Newsletter