Accounting Department
Featured Information on Breakeven Analysis
By: Larry D. Teall, EA
Accredited Tax Advisor
Breakeven analysis involves estimating the level of sales
necessary to operate a business on a breakeven basis.
Generally, the sale price for a product or service will more than cover the variable costs of producing that product or service, but the margin from sales must be enough to cover fixed costs as well. By performing a breakeven analysis and then varying
the assumptions regarding sales levels and variable and fixed costs, the real factors behind the profit potential (or lack thereof) of a business become more clear. This process will highlight the most significant factors and assumptions (particularly assumptions about the ability to
set prices) in the buyer's business plan.
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Larry D. Teall, EA, ATA |
Calculating the Breakeven Point
The following steps are involved in
calculating the breakeven point for a business.
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Identify the total fixed and variable costs
of the business based on actual results during a relevant time period.
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Calculate the contribution margin, as a
percent of sales as follows: Contribution margin = (Total sales - Variable
costs) / Total sales
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Calculate the breakeven point in dollars of
sales revenue as follows: Breakeven sales revenue = Total fixed costs /
Contribution margin
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If contribution margin is expressed in
dollars per unit, calculate the breakeven sales volume in units as
follows: Breakeven unit volume = Total fixed costs / Contribution margin
per unit
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Key Breakeven Factors
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Fixed Costs. These costs remain
constant (or nearly so) within the projected range of sales levels. These
can include facilities costs, certain general and administrative costs,
and interest and depreciation expense.
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Variable Costs. These costs vary in
proportion to sales levels. They can include direct material and labor
costs, the variable part of manufacturing overhead, and transportation and
sales commission expenses.
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Contribution Margin. This is equal
to sales revenues less variable costs. This amount is available to offset
fixed expenses and (hopefully) produce an operating profit for the
business.
Summaries and Status of FASB Statements
Statement No. 150
Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.
Statement No. 148
Accounting for Stock-Based Compensation—Transition and Disclosure—an amendment of FASB Statement No. 123
Statement No. 146
Accounting for Costs Associated with Exit or Disposal Activities
Checklist For Creating A New Business
Consult an accountant. Compare the tax aspects of various business entities.
Choose a business entity.
Consult an attorney regarding federal and state laws governing creation, ownership, and operation of the entity.
Draft and execute agreement among principals. Target the business start date.
File with state for certificate of assumed name (DBA).
Obtain a Federal Employer Identification Number (EIN).
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Info On Creating A New Business
BUSINESS ACCOUNTING SOFTWARE:
Good business accounting software in place, with a good knowledgeable
user operating it, can provide owners and managers with the information that
is critical to make a decision 30, 60 or 90 days out. |
