Required dollar amount of sales to create specific profit at 60% average markup?

[smm18951]

I decided to start a new small Internet site that sells 35 different items. The average markup of all 35 items is 60%. All the items have a very different cost that ranges from as little as $2.50 and as much as $35.00. I am trying to calculate the dollar amount required in sales to create the profit I need to 1000 dollars/month.

So basically I want to know how many sales ( in dollars ) is required to make my 1000 per month.

Is this even possible and is so what is the equation?
thanks to all

[akula]

yeahh...sure the calculation is possible
it's just a simple breakeven analysis

vc=variable costs per unit
fc=fixed costs
r=revenue per unit
x=units of product

breakeven=
(x)r-[fc+(x)vc]=0

profit=
(x)r-[fc+(x)vc]=1000

solve that equation and you'll get your required sales volume

[rogercbryan]

I would add one small caveat to you research. When talking about 35 different items it will be hard for you to make your equation if you don't know the probability of each item selling. This means some items may never sell while others might fly off the shelves. If you have a price range of $2.50 to $35.00 you could have different break even streams for each product.

If you are selling items that are available on Amazon I would go to that site and get the sales rank for each item as the lower the sales rank the higher the probability of sale. This will only work if all your items are in the same category in regards to Amazon.

If your items are not listed on Amazon I would pick the 2-5 that based on your market research will sell the best and then run your break even analysis on those items only. By lowering the over all items you are using in your formula you can get a more reliable average item number. This is also helpful when you start your marketing and optimization. It's easier to market 2-5 items then it is to market 35 when you are first getting started. A simple keyword competition analysis should show you which items are more in demand.

Let me know if you have any questions... gotta love Akula's Financial Formulas!

[smm18951]

First of all thank you guys so much for replying so quickly. I appreciate it. Thanks akula... great equations and rogercbryan, awesome point that I really didn't think about.

Here's what i came up with based on a few assumptions.
I just used the average markup across all 35 items, 60%
I thought about what constitutes revenue - R = C + P
so I was really solving for revenue and only new profit: 1000
Since Costs/item aren't fixed since they range in purchase price, I decided to make cost a function of profit: Cost = Profit/markup %
So if profit is 1000, and markup is 60% then,
Cost= 1000/.60
So my final equation looked like:
R = (profit/markup) + P
R = (1000/.60) + 1000
R = 2666.67
So I need to sell, on average, 2666.67 per month to make roughly 1000.00
I really only wanted a rough estimation for goal setting and I think this equation works, does anyone see any holes?

[rogercbryan]

Using total needed sales works well when you have varying prices. That's how I calculate needed sales for break even in my bookstore as prices very greatly. I'm not saying the math is right or wrong but using total sales as a goal works.

You still need to do a product marketing evaluation... you need to know what products will sell so you know what to market and what to optimize for.

[akula]

First of all thank you guys so much for replying so quickly. I appreciate it. Thanks akula... great equations and rogercbryan, awesome point that I really didn't think about.

Here's what i came up with based on a few assumptions.
I just used the average markup across all 35 items, 60%
I thought about what constitutes revenue - R = C + P
so I was really solving for revenue and only new profit: 1000
Since Costs/item aren't fixed since they range in purchase price, I decided to make cost a function of profit: Cost = Profit/markup %
So if profit is 1000, and markup is 60% then,
Cost= 1000/.60
So my final equation looked like:
R = (profit/markup) + P
R = (1000/.60) + 1000
R = 2666.67
So I need to sell, on average, 2666.67 per month to make roughly 1000.00
I really only wanted a rough estimation for goal setting and I think this equation works, does anyone see any holes?

looks good
given that your fixed costs are zero, if you sell $2666.67 worth of stuff, your variable cost will be $1666.67, which leaves you with a $1k pre tax profit.
your equation is not incorrect.

i don't see any holes than (potentially);

- your fixed costs may be underestimated. typically, a venture needs to support a full time fixed salary to be a viable opportunity. you may want to put in some fixed costs to see how much you have to sell in order for the venture to pay you a fixed wage. if you can't make that level of sales, then it's possible that the venture can't really support your financial needs in the long run.

- the variable costs may be underestimated. variable costs are typically not limited to COGS. if it's costing you $100 to buy a widget from a supplier which you then sell at a 60% markup for $160, your variable cost is not $100. that's just your COGS. what you also have (amongst other things) are customer acquisition costs. these may be variable (i.e it costs you $10 in PPC advertising to sell each $160 widget), or they may be fixed (i.e. you employ a sales person for 4k month who sells your widgets). this may need to be included in your analysis.

- tax considerations. the breakeven is only counting the gross profit. the figure that you might really be after is your take home profit. in this case, rather than calculating for $1000, you've gotta calculate for a higher amount commensurate with your tax rate