What every company should know ...

How to calculate the equilibrium point, an important financial analysis tool of entrepreneurs is used. Once you know the fixed and variable costs for the product your company produces or a good approximation of them, you can use this information to calculate breakeven for your business. Itis a popular tool used by small business owners to determine the amount of volume of their product, they have to sell to make a profit. It is also an important component of the cost-profit-volume relationship.

One thing is certain. In order to know how your product price , you must first know how to calculate the break-even point.

What is the break-even point?

From a business point of death is when sales cover their costs accurately. The company sells shares of its product enough to cover your expenses without profit or taking a loss. If you sell more, you make a profit. On the other hand, if there is a loss is needed, rather than sold.

To calculate the break-even point for a company in terms of sales volume, it is necessary to know the values of the three variables. These three variables are fixed costs, variable costs, and the price of the product. Fixed costs are those that do not change with the level of sales as a head. Variable costs are those that vary with the level of sales, such as cost of goods sold. The product price was set by the company through research, wholesale price of the product, or the cost of manufacture of the product, and marking.

How to calculate the break-even point?

To calculate the break-even point for your business, use the following formula:

Fixed price / costs - Variable costs = Breakeven units

In this formula, the fixed costs are recorded as total - fixed costs of the company. Basically, this means that the total loading of the company. Price of each product sold and the unit variable cost of the product - price and variable costs are, however, recorded as direct costs. The denominator of the equation, prices minus variable costs, called the contribution margin . In other words, the amount per unit of the product is sold, the company can help pay for its fixed costs.

Balancing An example

Costs calculated XYZ Company has made under the lease, depreciation of assets, managers salaries and property taxes. These fixed costs are $ 60,000. Your product is the widget. The variable costs associated with the production of the widget, are the raw material, work in factories and sales commissions. Variable costs were calculated at $ 0.80 per unit. The widget is priced at $ 2.00 each.

Given this information, you can calculate the point for the XYZ product widget deaths.

Fixed Cost / price - variable costs

$ 60,000 / $ 2.00 - $ 0.80 = 50,000 units

Company XYZ should produce and sell 50,000 widgets, cover its total costs, fixed and variable. At this level of sales, they are not going to do anything but break even.

What if change breakeven sales?

What if the change in sales? For example, if the economy could fall into a recession, sales. If sales decline, then it will not sell enough to make your score. In the example of XYZ, the 50,000 units required to break even can not sell. In this case, you would not be able to pay all your expenses. What can you do in this situation?

If the break-even formula search, you can see that there are two solutions. You can increase the price of your product or to find ways to reduce their costs , their fixed and / or variable costs.

Suppose you have a way to reduce the cost of their overhead or fixed costs by reducing his own salary at $ 10,000. This makes fixed costs were reduced from 60,000 to 50,000 dollars. The break-even point is now equal to the other variables:

50,000 $ 0.80 / $ 2.00 = $ 41,666 units

Expected, reduction of fixed costs can reduce the balance.

If you reduce your variable costs, reducing the cost of goods at $ 0.60 per unit break-even sold, hold other variables is the same, is:

60,000 $ 0.60 / $ 2.00 = $ 42,857 units

From this analysis one can see that if you reduce the variable costs, you can lower your breakeven point without increasing their prices.

Relationship between fixed costs, variable costs, prices and volumes

As a small business owner, you can see that any decision on the price of the product, the costs incurred in their company and sell the resulting volume are interdependent. Calculate the break-even point is only part of the cost-volume-profit.

You also have to consider how to allocate the costs in your company - the direct and indirect costs - a contribution to overheads.