Tax, Audit, Firm and Regulatory News

Today’s Accounting and Audit Topic (February 14, 2018)

]

Fixed vs. variable costs: How to compute breakeven

Breakeven analysis can be useful when investing in new equipment, launching a new product or analyzing the effects of a cost reduction plan. The breakeven point is fairly easy to calculate using information from your company’s income statement. Here are the details.

Analyzing your costs

Breakeven can be explained in a few different ways. It’s the point at which total sales are equal to total expenses. More specifically, it’s where net income is equal to zero and sales are equal to variable costs plus fixed costs.

To calculate your breakeven point, you need to understand a few terms:

Fixed expenses. These are the expenses that remain relatively unchanged with changes in your business volume. Examples: property taxes, salaries, insurance and depreciation.

Variable/semi-fixed expenses. Your sales volume determines the ebb and flow of these expenses. If you had no sales revenue, you’d have no variable expenses and your semifixed expenses would be lower. Examples: shipping costs, materials, supplies, advertising and training.

Applying the breakeven formula

The basic formula for calculating the breakeven point is:

Breakeven = fixed expenses / 1 – (variable expenses / sales).

Breakeven can be computed on various levels: It can be estimated for the company overall or by product line or division, as long as you have requisite sales and cost data broken down. For example, let’s suppose Division A generates $12 million in revenue, has fixed costs of $1 million and variable costs of $10.8 million. Here’s how those numbers fit into the breakeven formula:

Annual breakeven = $1 million / 1 – ($10.8 million / $12 million) = $10 million

Monthly breakeven = $10 million / 12 = $833,333

As long as expenses stay within budget, the breakeven point will be reliable. In the example, variable expenses must remain at 90% of revenue and fixed expenses must stay at $1 million. If either of these variables changes, the breakeven point will change.

Real-world applications

Many companies use breakeven point to set revenue goals and prepare budgets. In addition, breakeven analysis can tell you the amount of incremental sales you need to recoup an investment, such as buying a new machine or hiring a new salesperson. Alternatively, breakeven can help gauge the effects of cost reduction plans. Contact us if you have questions or need help working through the calculations.

 

© 2018

About Topel Forman

What makes our firm special

Contact Us

Reach out to Topel Forman

Services

Learn what we have to offer

Related News Posts

Maximize your QBI deduction with thoughtful planning

Maximize your QBI deduction with thoughtful planning

Discover key strategies to maximize your Qualified Business Income (QBI) deduction before it potentially expires in 2025. Learn how to navigate phaseouts, entity structures, and more to enhance your tax savings. Stay ahead with smart planning and ensure you capture this valuable opportunity.

read more
When saying “no” to an inheritance might make sense

When saying “no” to an inheritance might make sense

Most people spend time planning how to leave an inheritance—but far fewer consider when it might be smarter to decline one. In some cases, accepting assets can create unintended tax burdens or complicate long-term wealth planning. This article explores why, when, and how disclaiming an inheritance could be a strategic financial move.

read more