What level of sales will my firm earn a profit at?
– is a common question posed by someone establishing a new business. An established business that has gone through several difficult years can ask the same question. Others ask the question, „When will my firm be able to pay me a reasonable salary?”
The link between costs and revenues is at the core of break-even analysis or break-even point (próg rentowności). Understanding how expenses will fluctuate as sales rise or fall is crucial. Some expenses will go up as sales go up, while other expenses won’t alter whether sales go up or down.
Variable Costs (koszty zmienne)
Sales growth results in an increase in variable costs. They also fall off when sales do.
Fixed Costs (koszty stałe)
When sales rise, fixed expenses do not rise overall. When revenues decline, fixed expenses do not too. In other words, whether sales increase or decrease, fixed expenses like rent won’t vary.
Mixed Expenses
Some expenses are split between variable and fixed costs. Mixed expenses or semi-variable expenses are common names for these. A salesperson’s compensation (wynagrodzenie), which consists of a wage portion (a fixed expense) and a commission (prowizja) portion, serves as an illustration (variable expense). Combined expenses could be divided into two categories. The fixed amount may be included with other fixed expenses, while the variable portion may be mentioned with other variable expenses.
Contribution Margin (udział w pokryciu kosztów)
An important term used with break-even point or break-even analysis is contribution margin. In equation format it is defined as follows:
Contribution Margin = Revenues – Variable Expenses
Break-even Point In Units
The break-even point in units for a given company is the number of units it needs to sell/service in order to cover both the company’s fixed and variable expenses. The break-even point formula is to divide the total amount of fixed costs by the contribution margin per unit,
Example:
Break-even Point in Units per week = fixed expenses per week / contribution margin per unit
What makes a break-even point higher?
The amount of sales in units or dollars that equals a company’s total expenses (including the cost of goods sold) is known as the break-even point. To put it another way, this is the level of sales at which the income statement will show that there was no net income at all.
Examples of What Causes an Increase in the Break-even Point The break-even point can be raised by any combination of the following:
- an increase in the amount of the company’s fixed costs and expenses
- an increase in the company’s per-unit variable costs and expenses
- a decrease in the selling prices of the company
- an unfavorable shift in the product mix that is sold.
Take a short quiz to check your knowledge:
1. When there is a slight change in sales, fixed expenses – koszty stałe do not change overall.
2. A 5% sales commission – prowizja od sprzedaży would be an illustration of a fixed expense.
3. Rent and property taxes – podatek od nieruchomości are frequently fixed costs.
4. As volume – wielkość sprzedaży fluctuates, variable expenses – koszty zmienne change overall.
5. The monthly compensation – wynagrodzenie of an office manager is an illustration of a variable expense.
6. One illustration of a variable expense is the cost of items sold by a store.
7. Sales (or revenues – przychody) minus variable costs equals contribution margin.
8. The break-even point – próg rentowności is the point at which revenues and expenses, including cost of goods sold, are equal.
Key:
1. True 2. False 3. True 4. True 5. False 6. True 7. True 8. True
Would you like to talk business in English?
contact me