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What is a "Breakeven Point" ?
The point at which total cost and total revenue are equal.
If you want to determine your breakeven, you need to know three things,
1. Fixed Costs
2. Variable Cost per unit
3. Selling Price per unit
Breakeven = Fixed Costs / Price (unit)- Variable Costs (unit)
Or
Breakeven = Fixed Costs / Gross Profit Margin
Calculating a breakeven point for a new product or service is an important calculation all business owners do.
The key to calculating a correct breakeven point is correctly classifying costs.
Fixed Costs and Variable Costs are two important concepts to understand.
Fixed Costs, sometimes called “Overhead” are the costs that remain more or less the same month to month.
While changes and fluctuations are normal, these costs are not directly tied or associated with sales.
Expenses like rent, office expense, insurance, and payroll for administrative employees are typical fixed costs.
If sales declined or increased by 25%, these costs would more or less stay the same.
Variable costs, on the other hand, do change depending on the sales.
Examples of variable costs include inventory, sales commission, referral fees, shipping costs, payroll, contractors, and supplies and materials.
Variable costs are the costs that rise and fall when sales rise and fall.
Here is where is can be confusing.
The Profit & Loss statement can be a valuable tool to analyze your business performance.
Many bookkeepers and accountants structure the chart of accounts and the presentation of the Profit and Loss to align with taxes and generally accepted accounting principles (GAAP).
This commonly results in a Profit & Loss statement that is not ideal in layout and presentation.
Owner and managers need reports that focus on correctly categorizing fixed and variable costs.
When expenses are correctly allocated, determining Gross Profit, Net Profit and Breakeven becomes easier to calculate, and also more accurate.
James Fleming
Sentinel Tax & Accounting
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