How do you reduce a company's break-even point?

The formula for a product's break-even point expressed in units is: Total Fixed Costs divided by Contribution Margin per Unit. The contribution margin per unit is the product's selling price minus its variable costs and expenses. Fixed costs and fixed expenses are those which do not change as volume changes. Variable costs and expenses increase as volume increases and they will decrease when volume decreases.

To reduce a company's break-even point you could reduce the amount of fixed costs. When an automobile manufacturer cuts thousands of salaried positions and closes assembly plants that are not fully utilized, the company is reducing its fixed costs by hundreds of millions of dollars each year. Having fewer fixed costs means fewer car sales will be required to cover them.

You can also reduce the break-even point by increasing the contribution margin per unit. The contribution margin will increase if there is a reduction in variable costs and expenses per unit. For example, if a car company can obtain components at a reduced cost, the variable costs decrease. The reduced variable costs means that the contribution margin increased.

The contribution margin will also increase if the company is able to increase its selling prices. (Of course the company must be careful that the increased selling price does not cause fewer unit sales.)

Perhaps a combination of reduced fixed costs, reduced variable costs, and slight increases in prices is possible. Some products might be redesigned to provide unique features that customers will pay for and the additional revenue is greater than the variable costs required to add those features.

Reality is more complicated than a simple formula because companies have more than one product, competition may not allow for increasing selling prices, contracts may not allow certain actions, etc.