The Mystery of Calculating

The Breakeven Point

What in the world is it?

It is the point at which a company does not make any money.

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

$3,100.00

$2,900.00

Variable Costs

Fixed Costs

Remember - Variable Costs

will include the cost of merchandise sold plus other

costs such as salaries.

No Profit Realized...

OK -- That is fairly simple. Now -- how do we calculate that? Watch each slide ...

Step One…Calculate Contribution Margin Example: Information Needed for

Calculations:• Picture Framing Store: Net Sales $80,000, Variable Costs

$30,000, Fixed Costs 25,000.

$80,000 - $30,000 = $50,000 (CM) CM - should be enough to cover fixed costs

and of course profit.

Calculating CM

80,000Sales

30,000Variable

Costs

$50,000Contribution

Margin

FixedCosts

&Net

Profit

The CM is the amountleft over after all variable costs are

paid …

And that amountwill pay for fixedcosts and leave

a profit ..hopefully

Step 2, Calculating the Contribution Margin Rate (CMR).

Step: #2 - Use the CM to calculate the CMR

Contribution Margin / Net Sales = Contribution Margin Rate $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 (FixedCosts and Profit -- will be 62.5%)

Step 3, Calculating the Sales Dollar Breakeven Point 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. Total Fixed Costs / CMR = Sales Dollar Breakeven Point $25,000.00 / 62.5% = $40,000.00

The business has to sell $40,000.00 in order to breakeven.

37.5% of $40,000.00 will go towards Variable Costs or $15,000.00 62.5% of $40,000.00 will go towards Fixed Costs or $25,000.00 0 left over for a profit