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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.
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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