![]() ![]() ![]() Total fixed expenses ÷ Average contribution margin per unit Problems with Breakeven AnalysisĪ potential problem with the breakeven concept is that it assumes the contribution margin in the future will remain the same as the current level, which may not be the case. (Total fixed expenses – Depreciation – Amortization) ÷ Contribution margin percentageĪnother variation on the formula is to focus instead on the number of units that must be sold in order to break even, rather than the sales level in dollars. Total fixed expenses ÷ Contribution margin percentageĪ more refined approach is to eliminate all non-cash expenses (such as depreciation) from the numerator, so that the calculation focuses on the breakeven cash flow level. ![]() To calculate the breakeven point, divide total fixed expenses by the contribution margin. Implement any technologies that can improve the efficiency of the business, thereby increasing capacity with no increase in cost. Reduce or eliminate the use of coupons or other price reductions, since they increase the breakeven point. If an activity involves a fixed cost, consider outsourcing it in order to turn it into a per-unit variable cost, which reduces the breakeven point. Pay close attention to product margins, and push sales of the highest-margin items, thereby reducing the breakeven point. Also review variable costs to see if they can be eliminated, since doing so increases margins and reduces the breakeven point. Continually review all fixed costs, to see if any can be eliminated. Management should constantly monitor the breakeven point, particularly in regard to the last item noted, in order to reduce the breakeven point whenever possible. When the breakeven point is near the maximum sales level of a business, this means it is nearly impossible for the company to earn a profit even under the best of circumstances. Finally, this analysis is useful for establishing the overall ability of a company to generate a profit. If the downturn is expected to go well below the breakeven point, then management needs to examine possible cost-cutting measures in order to avoid incurring losses. This usually means that fixed costs go up, which therefore increases the breakeven point.Īnother possible use for breakeven analysis is determining the amount of losses that could be sustained if a business suffers a sales downturn. Another use for breakeven analysis is determining the impact on profit if automation (a fixed cost) replaces labor (a variable cost). This analysis establishes a maximum cap on profits. How Breakeven Analysis is Usedīreakeven analysis is useful for determining the amount of remaining capacity after the breakeven point is reached, which reveals the maximum amount of profit that can be generated. Knowing an organization’s breakeven point is useful for modeling its profitability under various scenarios. All sales above that level directly contribute to profits. In essence, once the contribution margin on each sale cumulatively matches the total amount of fixed costs incurred for a period, the breakeven point has been reached. At this point, all contribution margin earned is needed to pay for the company’s fixed costs. Contribution margin is the margin that results when all variable expenses are subtracted from revenue. Breakeven analysis is used to locate the sales volume at which a business earns exactly no money.
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