![]() These costs will stay the same regardless of whether you sell one unit or a million units. Some common fixed costs are your rent payments, insurance payments and money spent on equipment. Your fixed costs (or fixed expenses) are the expenses that don’t change with your sales volume. Calculating the breakeven point is just one component of cost-volume-profit analysis, but it’s often an essential first step in establishing a sales price-point that ensures a profit.The break-even point is calculated using three values. How Fixed Costs, Variable Costs, Price, and Volume RelateĪs the owner of a small business, you can see that any decision you make about pricing your product, the costs you incur in your business, and sales volume are interrelated. In this example, we did it without raising the price. If you reduce your variable costs by cutting your costs of goods sold to $0.60 per unit, holding everything else the same, you can see our breakeven point becomes:įrom this analysis, you can see that if you can reduce the cost variables, you can also lower your breakeven point. In that case, cutting fixed costs allows you to drop our breakeven point. Using the same formula and holding all other variables exactly as before, the breakeven point would then be: ![]() ![]() In this case, your fixed costs drop from $60,000 to $50,000. Let’s say you find a way to cut the cost of your overhead or fixed costs by negotiating a deal to cut your insurance by $10,000. How Cutting Costs Affects the Breakeven Point This is a bad scenario to be in, what can you do? If you look at the breakeven formula, you can see that there’s 2 possible solutions to this problem: In that case, you wouldn’t be able to pay all your expenses. In the example of ABCD Company, you might not sell the 50,000 units needed to break even. If sales are down, you risk not selling enough to hit your breakeven point. What happens if your sales do change? For example, if the economy slows down, your sales might decline. What Happens to the Breakeven Point If Sales Change At this stage of sales, they would make no profit but will break even. ![]() What this answer means is that ABCD Company has to produce and sell 50,000 plugins in order to cover all of their expenses, fixed and variable. With this information, we can calculate the breakeven point for ABCD Company’s product by using our formula above: Variable costs have been calculated to be $0.80 per unit. Their variable costs associated with producing the plugin includes raw material, labor and sales commissions. Those fixed costs add up to a total of $60,000. An Example of Finding the Breakeven PointĪBCD Company has calculated that it has fixed costs that consist of its rent, depreciation of assets and executive salaries. After unit variable costs are subtracted from the price, the amount left (contribution margin) is available to pay the fixed costs for that business. The denominator of this equation, price minus variable costs, would be referred to as the contribution margin. With this formula, fixed costs are stated as the total of all overhead for the company, whereas Price and Variable Costs are stated as per unit costs, which would be the price for each product unit sold. Now, the breakeven point is equal to the total fixed costs divided by the difference between the unit price and variable costs. In order to calculate your company’s breakeven point, you’ll need to use the following formula:įixed Costs ÷ (Price – Variable Costs) = Breakeven Point in Units
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