Posted by on 07.28.16
Business owners must know their breakeven point. Knowledge of the various components of the breakeven point allows business owners the ability to evaluate fixed costs, variable costs, margin, and profitability.
The breakeven point, using the contribution margin method, is computed as follows:
Operating costs = Breakeven point
Operating costs – Generally all costs other than direct costs (cost of sales).
Gross profit – Sales price minus all direct costs.
A company is a construction contractor with total sales of $5,000,000.
Direct costs related to the construction process are $4,000,000 for the year.
Gross profit is $1,000,000 or 20%
Operating costs: selling, general and administrative expenses are $1,250,000 per year.
The contractor’s breakeven point is calculated as follows:
BEP = Operating cost $1,250,000
Gross profit .20
BEP = $6,250,000
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