An Overview of Breakeven Point

An Overview of Breakeven Point

The breakeven point refers to the sales volume at which the company literally does not generate any profit (Also see Are Revenue and Profit the Same?). Under such a situation, the business still can cover its fixed costs. However, business owners need some knowledge about cost structure for them to identify the breakeven point, but they have too many tasks to do, and they can hardly free some time to delve in this. Hence, seeking help from an accounting firm in Johor Bahru can be a good choice if they want to know more about the financial position of their company.

Calculation of contribution margin involves the process of dividing the sum of fixed costs by the contribution margin in percentage to arrive at the breakeven point. To calculate the contribution margin, minus the variable cost from the net revenue of a product, then divide the resulting amount by the product revenue. If you would like to pay particular attention to the breakeven point on a cash flow level (Also see How to Handle the Cash Flow of Your Business?), you may subtract all the non-cash expenses from the sum of fixed costs before dividing it by the contribution margin.

The formula can also be derived to calculate the number of units of the products that a company needs to sell for it to reach the breakeven point. Hence, in the calculation, the company needs to divide the sum of fixed costs by the contribution margin per unit on average. This method focuses more on the number of units than the amount of sales in dollars, which may help the management in setting sales targets.

The breakeven point can be helpful to a business in many ways. By using the breakeven point, business owners will be able to identify the change in profits if it changes the prices of its products. Also, the breakeven point helps in determining the effects of replacing a variable cost with a fixed cost (Also see What are Variable Costs and Fixed Costs), for example, when automation replaces labour. Business owners can use it to identify the amount of capacity left after the business has reached its breakeven point. This is for them to know the maximum profit their company can earn. If the company has experienced a decrease in sales, the breakeven point will help identify the amount of losses that it may sustain.

As you can see, the breakeven point plays a crucial role in a business. Hence, the company’s management should always monitor it so that it may reduce it if possible. To do so, the management may carry out margin analysis. This is for it to track the product margins (Also see What Are Margin and Markup?) continually so that they can make an effort to increase the sales of the products with the highest margin to make the breakeven point to become lower. Besides the management can also implement cost analysis (Also see Introduction to Cost Accounting), which means that the company will always review the fixed and variable costs to determine whether it can eliminate any of them. This is because doing so helps in increasing margin (Also see An Overview of Gross Margin) and hence causes the breakeven point to reduce.

Apart from conducting margin analysis and cost analysis, the management should also pay close attention to the pricing of the company’s products. They need to reduce price reductions in any forms as doing so will cause an increase in the breakeven point. They may also consider increasing the prices of their products to an extent which is still acceptable to the consumers. Another approach of reducing the breakeven point is to outsource activities that involve fixed costs so that the company can change them into variable costs based on the number of units produced.

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