Many exporters undertake an export project, or look to trade with a new market or country without understanding whether it will be profitable, or what level of sales they must achieve, hours billed or products shipped in order to be profitable - basically they do not ask themselves "is it worth it?".

One method is to use The Breakeven Analysis: a tool that can be used to understand the point at which an export project becomes profitable.

The Breakeven Analysis can be performed on the company as a whole, or on the additional costs incurred when entering a new country.

Generally, the exporter will produce a breakeven for their base business, and then an additional breakeven for each new country entered. In this way, the exporter will be able to compare the level of investment versus the possible payback quantity or period for the new project or country.

The Breakeven Analysis is developed utilising a series of information:

Fixed costs – these are the costs that remain unchanged over time. For example, it may be the costs of office space, equipment, machinery etc. When producing an analysis of entering a new country where the product being sold will require a new machine to be purchased in order to meet the expanded manufacture quantity, then the cost of this machine would become part of the fixed costs (the value of which could be perhaps calculated on a straight line depreciation, and the corresponding amount inputted on to the fixed costs line of the graph).

Variable costs – These are the costs that vary with output. For example, a training company may have to produce course notes for each delegate that attends a training course, each additional delegate incurs a cost for producing the materials; the higher the number of delegates the higher the cost of production. Similarly a product company may use an amount of raw material and a fixed labour time for each unit produced; as the number of units being produced increase, so an incremental cost of material and labour is incurred.

Sales price – The price for each item sold e.g. price per unit for a product company, charge per hour or day for a service company.

The measurement unit – this is usually the product or service that is being purchased for example a service company could state the number of chargeable hours available or a manufacturer could state quantity of products.

These figures are plotted on a graph where the vertical axis is money (costs or value) and the horizontal axis is the measurement unit.

The amount of fixed cost is drawn as a straight horizontal line on a graph, in this example we will say £15,000.00.

The variable cost is then drawn above the fixed cost line. If the variable cost is £10.00 per unit, and you intend to sell 1,000 units, then a dot is placed at the intersection of 1,000 units (horizontal axis) and £10,000.00 (£10.00 x 1,000 units) above the fixed cost line. The total cost line is then drawn by joining the point on from vertical axis of the fixed cost line through the variable cost dot.

The sales line is drawn as follows: If each unit sells for £20.00, and you expect to sell 2,000 units, then a dot is place on the graph at the intersection of 2,000 units and £40,000.00. A line is then drawn from the origin (where the horizontal and vertical axis meet, through the sales dot, and carried on through.

Where the total sales line and variable cost line cross gives you the breakeven point (value is read from the horizontal axis). In this example, it is 1,500 units. Any quantity (or measured value) to the right of the breakeven point is profit, anything to the left is loss.

The resulting graph will be:

When using an electronic version of the analysis (see link below) it is also possible to run a series of what-if scenarios, where the effect on breakeven points can be assessed for various fixed and variable costs, and sales price.

Calculating the Breakeven Point
The breakeven point can be calculated using the formula:
Breakeven quantity = fixed costs ÷ (sales price – variable cost)
Where sales price and variable cost are per unit.

The advantage of using a graphical system is that it enables a clearer view and understanding of the effects of the various parameters on the breakeven point when running what-if scenarios.

Tip: The breakeven does have limitations as it does not take factors in to account such as the experience curve (the more times I do something, the more efficient and quicker I become), or the sliding scale of costs for materials (the more material I buy, the less I pay). However, it is a quick and easy tool to use in order to check the viability of a project, and is usually used in conjunction with other financial measures.

The link below is to an on-line breakeven analysis, developed and published by Learning Impact International Ltd. You will be asked to register the first time you enter the system, and then have a password assigned for continued use. It is one of the best on-line versions available, as it is possible to click and drag the breakeven line of the graph to view immediate changes to sales price.