The Mystery of Calculating The Breakeven Point

What in the world is it? w It is the point at which a company does not make any money. w It is the calculation to find out how much a company would have to sell in order to just break even -- in order to just pay their costs (variable and fixed).

Example $6,000 If sales for the month equalled $6,000 and all costs equalled $6,000 - Breakeven point would be $6,000 $3, $2, Variable Costs Fixed Costs Remember - Variable Costs will include the cost of merchandise sold plus other costs such as salaries.

No Profit Realized... w OK -- That is fairly simple. w Now -- how do we calculate that? w Watch each slide...

Step One…Calculate Contribution Margin w Example: Information Needed for Calculations: Picture Framing Store: Net Sales $80,000, Variable Costs $30,000, Fixed Costs 25,000. w $80,000 - $30,000 = $50,000 (CM) w CM - should be enough to cover fixed costs and of course profit.

Calculating CM 80,000 Sales 30,000 Variable Costs $50,000 Contribution Margin Fixed Costs & Net Profit The CM is the amount left over after all variable costs are paid … And that amount will pay for fixed costs and leave a profit.. hopefully

Step 2, Calculating the Contribution Margin Rate (CMR). w Step: w #2 - Use the CM to calculate the CMR w Contribution Margin / Net Sales = Contribution Margin Rate w $50,000 / $80,000 =.625% $80,000 Variable 37.5% CM 62.5% If we know CM is 62.5%, the Variable must be 37.5% Summary: Variable Costs take up 37.5% of sales and CM (Fixed Costs and Profit -- will be 62.5%)

Step 3, Calculating the Sales Dollar Breakeven Point w If we know that the Contribution Margin takes 63% of sales, and we know what the Fixed Costs are, then we can do the final calculation. w Total Fixed Costs / CMR = Sales Dollar Breakeven Point w $25, / 62.5% = $40, w The business has to sell $40, in order to breakeven. w 37.5% of $40, will go towards Variable Costs or $15, w 62.5% of $40, will go towards Fixed Costs or $25, w 0 left over for a profit