Issue No 10, July 1998.

NOTICE: Hard copies of the Australian New Crops Newsletter are available from the publisher, Dr Rob Fletcher. Details of availability are included in the Advice on Publications Available.

10. Break-Even analysis

Peter Blessing
Principal Teacher, Commerce Unit South Queensland Institute of TAFE
Toowoomba College
PO Box 80 Toowoomba Qld 4350

The planning of the commercialisation of a new crop is not complete until it is evident that the new crop product can be produced profitably. Lifestyle is important for any entrepreneur and its maintenance at an acceptable level is an important goal.

Lifestyle cannot be maintained without making enough money to cover expenses. The following steps permit the calculation of a break-even point, which is the amount of production which is required to break even.

As described on page 4, in the contribution from the Australian Securities and Investments Commission, it is not true that all expenses become tax deductions.

Such benefits can only be realised when a profit is achieved or the expenses can be successfully geared negatively against other income.

The goal in breaking even is for:

Money earned (Revenue) = Money spent (Total costs)

Step 1. Analysis of costs.

It is probably unrealistic to expect to recover all expenses in the first, second or even the third year of oper- ations. Some costs, the fixed costs, should be spread over a longer period of time whereas the variable costs, related directly to a season's production, should be recovered with each crop.

As an example, an analysis of total costs (per tonne) for chamomile would probably include those listed in Table 1, below.

Step 2. Calculation of revenue.

Revenue = price per unit x number of units sold

Step 3. Calculation of variable costs.

Variable costs = cost per unit x number of units produced

Step 4. Construction of a graph of fixed costs, variable costs and revenue against the size of production.

If chamomile was worth $15,000 per tonne revenue can be calculated, as shown in Table 2.

Revenue and Total Cost cross at the Break-even point in the graph on page 25.

If a producer sells any less than the break-even point (in this case, 4 tonnes), a loss will be incurred.

If a producer sells any more than the break-even point, a profit is likely.

TABLE 1

Fixed Costs (expenses incurred, regardless of production)	$	Variable Costs (expenses incurred, per tonne of product)	$
Lease/interest on land	500	Preparation of land	200
Lease on harvester	12000	Spraying	100
Lease on dryer	5000	Seeding	800
Return on research outlay	2500	Watering	1200
		Organic Fertilizer	200
		Harvest and drying costs	900
		Labour and supervision	4800
		Maintenance of equipment	800
		Motor vehicle expenses	1000
TOTAL	20000		10000

TABLE 2

Tonnes	Fixed costs + Variable costs = Total costs			Revenue
0	$20,000	$10,000 x 0 = $0	$20,000		$15,000 x 0 = $0
5	$20,000	$10,000 x 5 = $50,000	$70,000		$15,000 x 5 = $75,000
10	$20,000	$10,000 x 10 = $100,000	$120,000		$15,000 x 10= $150,000

Revenue and Total Cost cross at the Break-even point in the graph.

If a producer sells any less than the break-even point (in this case, 4 tonnes), a loss will be incurred.

If a producer sells any more than the break-even point, a profit is likely.

Any claims made by authors in the Australian New Crops Newsletter are presented by the Editors in good faith. Readers would be wise to critically examine the circumstances associated with any claims to determine the applicability of such claims to their specific set of circumstances. This material can be reproduced, with the provision that the source and the author (or editors, if applicable) are acknowledged and the use is for information or educational purposes. Contact with the original author is probably wise since the material may require updating or amendment if used in other publications. Material sourced from the Australian New Crops Newsletter cannot be used out of context or for commercial purposes not related to its original purpose in the newsletter

Contact: Dr Rob Fletcher, School of Land and Food, The University of Queensland Gatton College, 4345; Telephone: 07 5460 1311 or 07 5460 1301; Facsimile: 07 5460 1112; International facsimile: 61 7 5460 1112; Email: r.fletcher@mailbox.uq.edu.au

[New Crops Home Page] [New Crops Program] [Australian New Crops Newsletter] [New Crops Publications] [Order Form] [People] [Crop Profiles] [Other Resources]

originally created by: GK; latest update 6 June 1999 by: RF