There are two primary costs in the world of business. Fixed costs represent those costs which stay the same no matter what demand is. In other words, if your service business has no customers or a hundred, the cost of your fixed costs is the same. Variable costs change with demand for service. Calculating the break even point, or the point at which all costs are paid for, means considering both fixed and variable costs.
Identify the fixed costs associated with performing the service. These costs are usually administrative and do not depend on the increases or decreases in demand for business. Common fixed costs include rents, utilities and subscriptions (such as to journals). For this example, assume total fixed costs are $10,000.
Calculate the variable costs associated with providing the service. Common variable expenses are travel and telecommunications expenses. The largest variable expense for service companies is the cost of labor. For this example, assume you have 10 employees working five hours a day at a cost of $20 per hour for five days. The total labor cost is $100 multiplied by 10 multiplied by 5 or $5,000. Other variable costs equal $5,000. $5,000 plus $5,000 equals $10,000.
Calculate the total variable and fixed costs. In this example the answer is $20,000.
Calculate the break-even point per hour. (At five hours for five days, the total is 25 hours. Divide $20,000 by 25 hours. The answer is $800 per hour.)