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Finding
out what sales volume you need to achieve to at least breakeven is critical
to managing your business. Once you know what your variable costs and fixed
costs are, finding your breakeven point is easy.
Variable
costs are directly related to your sales levels in dollars or units
sold. For example, materials and supplies, commissions on sales, sales
incentives or bonuses for employees and shipping costs are all considered
variable costs.
Fixed
costs are those costs that remain the same no matter what volume of
sales your business has. These include rent, insurance, licenses, wages for
permanent employees, interest on loans and operational expenses.
How
to determine your breakeven point:
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Subtract
your Variable Costs per Unit from your Sales Price per Unit. This equals
your Contribution Margin per Unit.
-
Divide
your Contribution Margin per Unit by Sales Price per Unit. This equals
your Contribution Margin Ratio.
-
Now
divide your Fixed Costs by your Contribution Margin Ratio. This equals
your Breakeven Sales Volume.
If
this seems confusing, consider this example when you receive your financial
statements from your accountant you see that your
Fixed
costs = $25,000
Variable
costs per unit of production = .50
Sales
revenue unit of production = $1.25
From
this you learn that 50 cents of every unit sold goes toward covering your
variable cost per unit. Furthermore, you know that 75 cents from each unit
sold can go toward covering your fixed costs.
Now
if you divide your fixed costs ($25,000) by the contribution to those costs
per unit (.75), you will know what level of sales you need to achieve in
order to break even.
Fixed
Costs/Contribution to Fixed Cost per Unit = Breakeven Point
25,000
/ .75 = 33,333.33
Understanding
your breakeven point is important. But if you take your analysis one step
further you can better manage your business. For
example, you can see that a 10,000 increase in sales volume to 43,333 will
yield a $7,500 profit. Likewise you can see that a 10,000 decrease in sales
volume will produce a loss of $7,500.
Understanding
your breakeven point is just the beginning to making the most of your
financial statements.
If
you would like to discuss your breakeven point or would like help with
implementing any of the ideas in this article, please contact our office.
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