Break Even Analysis
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Break-even analysis is a useful concept for running a B & B and is the point at which all costs are covered and no profit is made. Costs can be split into:
- Fixed costs: costs which you have to pay regardless of whether you have any guests or not - rates, council fees, Certificate of Licence (Food Act 2006), bank loan interest etc;
- Semi-variable costs: costs which are somewhere between fixed and variable - labour if you are employing someone part-time to clean, prepare breakfast etc;
- Variable costs: costs which rise and fall in direct proportion to the activity of the business and include such items as food, beverages and cleaning products.
For the purposes of this exercise fixed and variable costs only will be used.
Other pieces of information which you need to know prior to the calculation of the break-even point are:
- Selling price of the room
- Contribution margin/unit.
It is probably best to look at a worked example at this point.
Assume a B & B of 3 rooms with a nightly tariff of $90.
Total possible room nights per year = 365 x 3 = 1095 nights.
* Theoretically you could earn 1095 x 90 = $98,550 per annum but it is highly unlikely that you could fill every room every night of the year, apart from the fact that you would be exhausted from never having a rest.
Selling price of a double = $90
Variable cost for providing breakfast and cleaning = $36
Fixed costs regardless of business activity = $20,000
Contribution margin/unit = S.P. - V.C.
= $90 - $36
= $54
Break-even point = Fixed Cost
Contribution margin/unit
= 20000 = 370 room nights
54
Occupancy for Break- even = 370 x 100 = 33.8%
1095
Further nights are pure profit to you.