The breakeven point of sales is a crucial figure for determining profitability. It is calculated by dividing weekly fixed expenses by the per-unit contribution margin, or by using the contribution margin ratio to determine the dollar amount of weekly sales needed to cover fixed costs. Failure to reach this point results in lost profits.
Most businesses in business want a profit on their business, whether it’s selling goods or services. A common formula for determining how much revenue is needed to stay in business is the breakeven point of sales. The basic formula for this measure divides a company’s weekly fixed expenses by the per-unit contribution margin, which translates into total units to sell in order to cover all basic expenses. The breakeven point of sales can also yield a dollar figure that a company must earn to break even. The latter formula divides weekly fixed expenses by the contribution margin ratio to get weekly dollar sales to break even.
A breakeven point in sales is a primary starting figure for determining the profitability of a project or individual product. Owners and executives often use this formula to estimate how many units or dollars their company needs to sell in a given market. After calculating the break-even calculation, owners and management can determine whether this selling point can be achieved under current economic conditions. For example, if a company needs to sell 350 units of a certain product, the business needs to find markets where this is possible. Failure to reach this breakeven point results in lost profits.
The basic break-even points in the sales formula mentioned above divide the weekly fixed expenses by the contribution margin per unit. Weekly fixed expenses are the only costs included since companies have to pay for these costs whether or not a business produces goods or services. The contribution margin subtracts the per-unit variable costs of producing a good or service from the per-unit selling price for the good or service. The result is the contribution margin per unit. Variable costs should only occur when a company actually produces products, which is why the contribution margin includes costs in its formula.
The contribution margin ratio at breakeven point of sales is a different formula. This formula divides the contribution margin by the unit selling price. Once a company calculates this ratio, it can then divide the weekly fixed expenses by the result in order to determine the dollar amount of weekly sales to cover the fixed costs. This formula works best for a company that has a large sales mix—that is, more products it produces for sale to consumers. In this scenario, it is more important to know sales dollars rather than units in order to determine the sales break-even point.
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