This section of your business plan provides the reader with insight on the amount of monthly sales you need in order to break-even. There are different ways to calculate this formula, so we have suggested the following option:

Average Monthly Sales Break Even point  = Average Monthly Fixed Costs/(1 - Average Monthly Variable Cost Ratio)

Average Monthly Variable Cost Ratio is Average Monthly Variable Costs divided by Average Monthly Sales.  Average Monthly Variable Costs are the costs that are directly and proportionally related to production and selling (for example: purchases of inventory or raw materials, shipping, etc.)

Average Monthly Fixed Costs are the costs that are not directly and proportionally related to your production and selling.  These costs, such as rent and wages, are generally referred to as overhead.  They are costs that do not automatically increase with increased sales.  It’s important to distinguish between indirectly related expenses and directly related expenses.  

For example, wages are generally considered fixed costs because usually, your employees are paid the same amount whether they are producing and selling 80 units a month or 100 units a month.  Even though you might need to hire extra personnel if your sales increase, this is an indirect effect of increased sales.  Buying more raw materials to make more product is a direct effect of increased sales, and is directly linked to sales.  Thus, raw materials purchases are examples of Variable Costs, while wages are an example of Fixed Costs.