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If you have difficulty answering the following questions, learn more about this topic by reading our Break-even Point (Explanation).
Fixed Expenses do not change in total when there is a modest change in sales.
An example of a fixed expense would be a 5% sales commission.
Property taxes and rent are often fixed expenses.
Variable expenses change in total as volume changes.
An example of a variable expense is an office manager's monthly salary.
A retailer's cost of goods sold is an example of a variable expense.
Contribution margin is defined as sales (or revenues) minus variable expenses.
Break-even point is the point where revenues equal the total of all expenses including the cost of goods sold.
The break-even point in dollars of revenues is equal to the total of the fixed expenses divided by the contribution margin per unit.
If a company requires a profit of $30,000 (instead of breaking even), the $30,000 should be combined with the fixed expenses in order to compute the point at which the company will earn $30,000.
If a company has mixed expenses, the fixed component can be combined with the company's fixed expenses and the variable component can be combined with the company's variable expenses when computing the break-even point.
Decreasing a company's fixed expenses should reduce the break-even point.
The contribution margin per unit is the selling price per unit minus the fixed expenses per unit.
Break-even analysis is useful for companies that sell products, but it is not useful for companies that provide services.
What is the company's contribution margin?
What is the break-even point in units?
If the company wants to earn a profit of $42,000 instead of breaking even, what is the number of units the company must sell?
What is the company's contribution margin ratio?
What is the break-even point in dollars?
If the company wants to earn a profit of $35,000 instead of breaking even, what is the amount of sales or revenue dollars the company must achieve?
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