Understanding the Breakeven Point

Posted by Jack Craven on Wed , May 13 , 2015

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 the number of units sold, dollars of total sales, or possibly hours billed out.

The calculation of the breaking point is an iatrical component of the cost volume profit analysis for any business. We'll explain more about this below:

  • 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.

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