Bunthong Breakeven Point

Breakeven Point

To calculate this breakeven point, you need:

 Spread all the expenses of the exercise in two categories:

- the amount of all fixed expenses: all expenses which you must obligatorily assume, even if you do not sell. For example: rent of commercial premises, wages, social charges, insurance premiums,

- the amount of all variable expenses: amount of expenses automatically arising from the level of sales. These are mainly the supplies corresponding to the turnover achieved, transport  costs on purchases and / or sales, commission paid on sales ...

 Calculate the margin on variable costs which is equal to the projected sales amount minus the variable expenses automatically driven by these sales.

 Translate this margin as a percentage of turnover, this is the margin rate on variable costs, dividing the margin on variable costs by the amount of the turnover and multiplying the result by 100.

 Divide the amount of fixed costs by this margin rate to get the breakeven point: amount of turnover that will pay for all fixed charges.

As soon as sales exceed the breakeven point, the company will start generating profits.

The breakeven point is a good indicator to complete the realism of the project, because it can be translated concretely in number of hours to invoice, in number of articles to be sold on average per day (or per week), etc.

Example

Let’s take a look at an example of each of these formulas. Barbara is the managerial accountant in charge of a large furniture factory’s production lines and supply chains. She isn’t sure the current year’s couch models are going to turn a profit and what to measure the number of units they will have to produce and sell in order to cover their expenses and make at $500,000 in profit. Here are the production stats.