Part 1 – Understanding B/E;
Understanding breakeven is all about the relationship between 3 factors – Price, Volume, Costs.
Price – how much you sell your products/services for
Volume – how much of it you sell
Costs – what it cost you to that
Whatever is left over is your profit, so how do we maximise the profit, understand and determine other key business drivers?
By understanding were your breakeven point is you are about to work out and determine the relationships between price, volume and cost, eg:
- How far sales can decline before you start to incur loses
- How discounting and sales volumes impact on profits
- Home much sales need to increase to make up for an increase in cost
The relationship is, if cost increases (which it often does), how much more (volume) do you need to sell or how much higher (price) needs to go for you to breakeven.
Or let’s say if you decide to have a sale and put prices down, how much more (volume) do you need to sell or how much lower does cost need to go before you breakeven.
In order to understand breakeven, we first must understanding classification of cost, as either fixed or variable. Costs are classified by their behaviour. Eg
The relationship between fixed and variable cost on sales is easily illustrated below.
Therefore we have determined (COGS) are variable cost and expenses can be either variable or fixed as shown below.
So classifying cost and understanding how they behave is the basis for breakeven calculation and analysis, in part 2 we will walk through a case study and calculate breakeven point.
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