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 of your business product or an approximation of them, you can use this information to calculate the point of business balance sheet. Itis a popular tool used by small business owners to determine the amount of the volume of their product, they have to sell to make a profit. It is also an important component of the cost-volume-profit.

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 death is when the sale to cover their expenses accurately. The company sells shares of its product enough to cover their costs, without a gain or a loss of revenue. If it sells well, it has an advantage. On the other hand, if it sells for less, you suffer a loss.

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?

In order to calculate the point of balancing your business, use the following formula:

Fixed / price Cost - variable cost = unit adjustment

Fixed costs of the company - in this formula are the total fixed costs presented. Basically, this means the total cost to the entity. Selling price of each product and the unit variable cost of the product - but captures price and variable costs 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 at $ 0.80 per unit calculated. The widget is priced at $ 2.00 each.

With this information we can calculate the point, the XYZ Company product, the balance of widgets.

Fixed cost / price - variable costs

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

To produce XYZ company and sell to cover 50,000 widgets on its total fixed and variable costs. At this level of sales, they will not make a profit, but to break even.

What about the breakpoint Even if the change in sales?

What if the change in sales? For example, when the economy will fall into a recession, sales. If the decline in sales, so they do not sell enough to break even. 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 the product, or you find ways, to reduce their costs , their and / or their fixed and variable costs.

Let's say you to reduce a way the cost of their overhead or fixed costs by reducing his own salary at $ 10,000. This makes the fixed costs reduced by 60,000 $ 50,000. 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 your variable costs to reduce by being their cost of sales at $ 0.60 per unit, then the breakeven point, other variables equal, is to:

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

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

Relationship between fixed costs, variable costs, prices and quantities

As a small business owner, you can see that any decision about pricing your 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 costs in your company - the direct and indirect costs - a contribution to overheads.