What is a breakeven point and how do you compute it?
The breakeven point in your business is where all direct and indirect costs have been met. You are neither making nor losing any money. The breakeven point can be measured in number of units sold, dollars of total sales, or possibly hours billed out.
To calculate your breakeven point, you must first determine your direct (variable) and your indirect (fixed) costs. Direct costs vary with the number of units sold. For every unit you sell, you must buy another set of the components. Your indirect costs don’t normally vary for a given volume of business. Your gross profit per unit (sales less direct costs, known as the contribution margin) goes toward paying for these indirect costs. Once the indirect costs have been paid, you have reached the breakeven point. The gross profit from every unit sold over the breakeven point goes to the bottom line as profit.
To simplify this example, let’s assume that you run a food stand that sells only hamburgers. For every burger you sell, you need to buy meat, bun, trimmings, and a paper serving plate. Assume your burger sells for $6 and the total of the above direct costs is $2 per burger. This means that you have a contribution margin of $4 to go toward fixed costs.
Your fixed costs include such things as rent, insurance, advertising, taxes, and so on. Within limits, selling a few more burgers will not cause these expenses to increase. If your total fixed costs are $100 a day, your breakeven point is 25 burgers or $150. Once you pass 25 burgers, $4 from each additional sale goes to your bottom line as profit.
David Compton is a Certified Public Accountant with offices in Meridian and Birmingham, Ala.