Contact us today if you have questions or would like to see how we can partner with you. Our audit & assurance team can help you work through these calculations. Alternatively, breakeven can help gauge the effects of cost reduction plans. In addition, breakeven analysis can tell you the amount of incremental sales you need to recoup an investment, such as buying a new machine or hiring a new salesperson. Many companies use breakeven point to set revenue goals and prepare budgets. If either of these variables changes, the breakeven point will change. In the example, variable expenses must remain at 90 percent of revenue and fixed expenses must stay at $1 million. ![]() Monthly breakeven = $10 million / 12 = $833,333Īs long as expenses stay within budget, the breakeven point will be reliable. Here is how those numbers fit into the breakeven formula:Īnnual breakeven = $1 million / 1 – ($10.8 million / $12 million) = $10 million For example, suppose Division A generates $12 million in revenue, has fixed costs of $1 million and variable costs of $10.8 million. ![]() The basic formula for calculating the breakeven point is:īreakeven = fixed expenses / 1 – (variable expenses / sales).īreakeven can be computed on various levels: it can be estimated for the company overall or by product line or division, as long as you have requisite sales and cost data broken down. Examples: shipping costs, materials, supplies, advertising, and training. If you had no sales revenue, you would have no variable expenses and your semi-fixed expenses would be lower. Your sales volume determines the ebb and flow of these expenses. Examples: property taxes, salaries, insurance, and depreciation. These are the expenses that remain relatively unchanged with changes in your business volume. To calculate your breakeven point, you need to understand a few terms:įixed expenses. More specifically, it is where net income is equal to zero and sales are equal to variable costs plus fixed costs. It is the point at which total sales are equal to total expenses. Here are the details:īreakeven can be explained in a few different ways. ![]() The breakeven point is fairly easy to calculate using information from your company’s income statement. In the first equation, you divide the total fixed costs by the contribution margin per unit (price per unit minus variable cost per unit). Breakeven analysis can be useful when investing in new equipment, launching a new product, or analyzing the effects of a cost reduction plan.
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