under<\/strong> the break-even point by the pcp will tell the dollars lost.<\/p>\nthis calculation assumes that the fixed costs will not change from period to period. if they do, then adjustments must be made in the formula. for example, if there is a major repair, the break-even analysis can tell how much additional sales are needed to recover that cost. just divide the additional cost by the pcp.<\/p>\n
generally, the break-even point should stay about the same from month to month. however, users should be aware and sensitive to extraordinary items and changing conditions and adjust the formula accordingly. in reality, the fixed costs are fixed for a range of sales. for instance, a 20 percent upward or downward shift in sales should not cause any change in the fixed costs. however, a 50 percent shift would, either requiring greater expenditures for increases or contracting of costs for decreases. an example could be shown with rent. an upward change that appears to become the norm would cause expanding into additional or larger facilities.<\/p>\n
a confusing cost is most advertising costs because advertising is usually described as a percentage of sales. however, it is always committed to before the sales are made, making its expenditure independent of the sales volume. therefore, it is a fixed expense.<\/p>\n
however, as with a lot of things there are exceptions. if advertising fees or commissions are paid based on search engine sales, then they become a variable cost because the amount paid is solely based on sales volume.<\/p>\n
so, the lesson here is that nothing should be assumed, and the underlying activity needs to be thought out and understood thoroughly before classification decisions are made or acted upon.<\/p>\n
three forms of break-even analysis compared<\/h3>\n
note that some items have fixed and variable elements and these should be broken into components and classified accordingly. an example could be direct labor, where a base of the labor force would never be reduced.<\/p>\n
for example:<\/strong> a direct labor force of 100 people might include 20 people as the rock-bottom minimum that would always be retained, as long as the operation is in effect. therefore, the costs of those 20 people would be considered as fixed (and those dollars would be recorded as fixed) and anything over that, i.e., the 80 people would be variable and shown as a percentage of sales. accordingly, if sales increase then the variable labor would be added to, and if sales drop, the variable portion would decrease, but the fixed portion would not change.<\/p>\nfollowing is a comparison between a conventional form of financial statement and break-even form.<\/p>\n
<\/p>\n
\n\n\n\nbreak-even analysis \u2013 illustration 1<\/h3>\n<\/td>\n<\/tr>\n\nmanufacturing co., inc.<\/strong><\/td>\n\u00a0<\/strong><\/td>\n<\/tr>\n\nbreak-even analysis \u2013 monthly amounts<\/strong><\/td>\n<\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n<\/tr>\n | \n\u00a0<\/strong><\/td>\n\u00a0<\/strong><\/td>\nconventional format<\/strong><\/td>\n\u00a0<\/strong><\/td>\nbreak-even format<\/strong><\/td>\n<\/tr>\n\n\u00a0<\/strong><\/td>\n\u00a0<\/strong><\/td>\n$<\/strong><\/td>\n%<\/strong><\/td>\n\u00a0<\/strong><\/td>\n$<\/strong><\/td>\n%<\/strong><\/td>\n<\/tr>\n\nsales<\/td>\n | 1,000,000<\/td>\n | 100.00%<\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n<\/tr>\n | \n<\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n<\/tr>\n | \ncost of goods sold<\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n<\/tr>\n | \n<\/td>\n | inventory \u2013 beginning*<\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n<\/tr>\n | \n<\/td>\n | purchases<\/td>\n | 230,000<\/td>\n | 23.00%<\/td>\n | <\/td>\n | <\/td>\n | 23.00%<\/td>\n<\/tr>\n | \n<\/td>\n | direct labor **<\/td>\n | 250,000<\/td>\n | 25.00%<\/td>\n | <\/td>\n | 70,000<\/td>\n | 18.00%<\/td>\n<\/tr>\n | \n<\/td>\n | indirect labor<\/td>\n | 34,000<\/td>\n | 3.40%<\/td>\n | <\/td>\n | 34,000<\/td>\n | <\/td>\n<\/tr>\n | \n<\/td>\n | rent<\/td>\n | 40,000<\/td>\n | 4.00%<\/td>\n | <\/td>\n | 40,000<\/td>\n | <\/td>\n<\/tr>\n | \n<\/td>\n | utilities<\/td>\n | 18,000<\/td>\n | 1.80%<\/td>\n | <\/td>\n | 18,000<\/td>\n | <\/td>\n<\/tr>\n | \n<\/td>\n | insurance<\/td>\n | 7,000<\/td>\n | 0.70%<\/td>\n | <\/td>\n | 7,000<\/td>\n | <\/td>\n<\/tr>\n | \n<\/td>\n | factory maintenance and supplies<\/td>\n | 14,000<\/td>\n | 1.40%<\/td>\n | <\/td>\n | 14,000<\/td>\n | <\/td>\n<\/tr>\n | \n<\/td>\n | depreciation<\/td>\n | 30,000<\/td>\n | 3.00%<\/td>\n | <\/td>\n | 30,000<\/td>\n | <\/td>\n<\/tr>\n | \n<\/td>\n | less inventory \u2013 end*<\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n<\/tr>\n | \n<\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n<\/tr>\n | \n<\/td>\n | total cost of goods sold<\/td>\n | 623,000<\/td>\n | 62.30%<\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n<\/tr>\n | \n<\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n<\/tr>\n | \ngross profit<\/td>\n | 377,000<\/td>\n | 37.70%<\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n<\/tr>\n | \n<\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n<\/tr>\n | \nselling, general and administrative<\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n<\/tr>\n | \n<\/td>\n | sales manager<\/td>\n | 25,000<\/td>\n | 2.50%<\/td>\n | <\/td>\n | 25,000<\/td>\n | <\/td>\n<\/tr>\n | \n<\/td>\n | sales commissions<\/td>\n | 80,000<\/td>\n | 8.00%<\/td>\n | <\/td>\n | <\/td>\n | 8.00%<\/td>\n<\/tr>\n | \n<\/td>\n | shipping salaries<\/td>\n | 40,000<\/td>\n | 4.00%<\/td>\n | <\/td>\n | 16,000<\/td>\n | 2.40%<\/td>\n<\/tr>\n | \n<\/td>\n | other selling costs<\/td>\n | 25,000<\/td>\n | 2.50%<\/td>\n | <\/td>\n | 25,000<\/td>\n | <\/td>\n<\/tr>\n | \n<\/td>\n | officers’ payroll<\/td>\n | 80,000<\/td>\n | 8.00%<\/td>\n | <\/td>\n | 80,000<\/td>\n | <\/td>\n<\/tr>\n | \n<\/td>\n | office payroll<\/td>\n | 40,000<\/td>\n | 4.00%<\/td>\n | <\/td>\n | 40,000<\/td>\n | <\/td>\n<\/tr>\n | \n<\/td>\n | rent and utilities<\/td>\n | 7,500<\/td>\n | 0.75%<\/td>\n | <\/td>\n | 7,500<\/td>\n | <\/td>\n<\/tr>\n | \n<\/td>\n | telephone<\/td>\n | 9,000<\/td>\n | 0.90%<\/td>\n | <\/td>\n | 9,000<\/td>\n | <\/td>\n<\/tr>\n | \n<\/td>\n | other general and administrative<\/td>\n | 11,000<\/td>\n | 1.10%<\/td>\n | <\/td>\n | 11,000<\/td>\n | <\/td>\n<\/tr>\n | \n<\/td>\n | depreciation<\/td>\n | 7,500<\/td>\n | 0.75%<\/td>\n | <\/td>\n | 7,500<\/td>\n | <\/td>\n<\/tr>\n | \n<\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n<\/tr>\n | \n<\/td>\n | total sg&a<\/td>\n | 325,000<\/td>\n | 32.50%<\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n<\/tr>\n | \n<\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n<\/tr>\n | \nnet income before interest and taxes<\/strong><\/td>\n52,000<\/strong><\/td>\n5.20%<\/strong><\/td>\n\u00a0<\/strong><\/td>\n\u00a0<\/strong><\/td>\n\u00a0<\/strong><\/td>\n<\/tr>\n\n\u00a0<\/strong><\/td>\ntotals<\/strong><\/td>\n\u00a0<\/strong><\/td>\n\u00a0<\/strong><\/td>\n\u00a0<\/strong><\/td>\n434,000<\/strong><\/td>\n51.40%<\/strong><\/td>\n<\/tr>\n\n<\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n<\/tr>\n | \n\u00a0* inventory is not calculated for this simplified illustration<\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n<\/tr>\n | \n\u00a0** all labor costs above include taxes and fringes<\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n<\/tr>\n | \n<\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n<\/tr>\n | \nproof of break-even analysis<\/strong><\/td>\n<\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n<\/tr>\n | \n<\/td>\n | profit contribution percent (100% – variable percent)<\/td>\n | <\/td>\n | <\/td>\n | 48.60%<\/td>\n<\/tr>\n | \n<\/td>\n | fixed costs<\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | 434,000<\/td>\n<\/tr>\n | \n<\/td>\n | break-even sales (fixed costs \u00f7 profit contribution percent)<\/td>\n | <\/td>\n | <\/td>\n | 893,004<\/td>\n<\/tr>\n | \n<\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n<\/tr>\n | \n<\/td>\n | sales for month<\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | 1,000,000<\/td>\n<\/tr>\n | \n<\/td>\n | excess over break-even sales<\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | 106,996<\/td>\n<\/tr>\n | \n<\/td>\n | multiplied by profit contribution percent (monthly profit)<\/td>\n | <\/td>\n | <\/td>\n | 52,000<\/td>\n<\/tr>\n | \n<\/td>\n | profit per conventional format<\/strong><\/td>\n\u00a0<\/strong><\/td>\n\u00a0<\/strong><\/td>\n\u00a0<\/strong><\/td>\n\u00a0<\/strong><\/td>\n52,000<\/strong><\/td>\n<\/tr>\n\n<\/td>\n | difference or proof<\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | 0<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n <\/p>\n <\/p>\n \n\n\n\nbreak-even analysis \u2013 illustration 2<\/h3>\n<\/td>\n<\/tr>\n\n<\/td>\n | jan<\/strong><\/td>\nfeb<\/strong><\/td>\nmar<\/strong><\/td>\napr<\/strong><\/td>\nmay<\/strong><\/td>\nfixed<\/strong><\/td>\nvariable <\/strong><\/td>\n<\/tr>\n\nsales<\/td>\n | 1,000,000<\/td>\n | 1,000,000<\/td>\n | 1,200,000<\/td>\n | 800,000<\/td>\n | 1,000,000<\/td>\n | <\/td>\n | <\/td>\n<\/tr>\n | \n<\/td>\n | <\/td>\n | <\/td>\n | \u00a0<\/strong><\/td>\n\u00a0<\/strong><\/td>\n<\/td>\n | <\/td>\n | <\/td>\n<\/tr>\n | \ncost of sales<\/td>\n | <\/td>\n | <\/td>\n | \u00a0<\/strong><\/td>\n\u00a0<\/strong><\/td>\n<\/td>\n | <\/td>\n | <\/td>\n<\/tr>\n | \ninventory \u2013 beginning<\/td>\n | 1,000,000<\/td>\n | 1,000,000<\/td>\n | 1,000,000<\/td>\n | 928,800<\/td>\n | 1,000,000<\/td>\n | <\/td>\n | <\/td>\n<\/tr>\n | \npurchases<\/td>\n | 250,000<\/td>\n | 250,000<\/td>\n | 300,000<\/td>\n | 200,000<\/td>\n | 250,000<\/td>\n | <\/td>\n | 25.0%<\/td>\n<\/tr>\n | \ndirect labor<\/td>\n | 200,000<\/td>\n | 200,000<\/td>\n | 200,000<\/td>\n | 200,000<\/td>\n | 200,000<\/td>\n | 200,000<\/td>\n | <\/td>\n<\/tr>\n | \nindirect labor<\/td>\n | 30,000<\/td>\n | 30,000<\/td>\n | 30,000<\/td>\n | 30,000<\/td>\n | 30,000<\/td>\n | 30,000<\/td>\n | <\/td>\n<\/tr>\n | \npayroll taxes and benefits<\/td>\n | 69,000<\/td>\n | 69,000<\/td>\n | 69,000<\/td>\n | 69,000<\/td>\n | 69,000<\/td>\n | 69,000<\/td>\n | <\/td>\n<\/tr>\n | \nrent<\/td>\n | 30,000<\/td>\n | 30,000<\/td>\n | 30,000<\/td>\n | 30,000<\/td>\n | 30,000<\/td>\n | 30,000<\/td>\n | <\/td>\n<\/tr>\n | \nutilities<\/td>\n | 20,000<\/td>\n | 20,000<\/td>\n | 24,000<\/td>\n | 16,000<\/td>\n | 20,000<\/td>\n | <\/td>\n | 2.0%<\/td>\n<\/tr>\n | \ninsurance<\/td>\n | 3,000<\/td>\n | 3,000<\/td>\n | 3,000<\/td>\n | 3,000<\/td>\n | 3,000<\/td>\n | 3,000<\/td>\n | <\/td>\n<\/tr>\n | \nfactory costs<\/td>\n | 20,000<\/td>\n | 20,000<\/td>\n | 20,000<\/td>\n | 20,000<\/td>\n | 20,000<\/td>\n | 20,000<\/td>\n | <\/td>\n<\/tr>\n | \ndepreciation<\/td>\n | 4,000<\/td>\n | 4,000<\/td>\n | 4,000<\/td>\n | 4,000<\/td>\n | 4,000<\/td>\n | 4,000<\/td>\n | <\/td>\n<\/tr>\n | \nless inventory \u2013 end<\/td>\n | -1,000,000<\/td>\n | -1,000,000<\/td>\n | -928,800<\/td>\n | -1,000,000<\/td>\n | -1,000,000<\/td>\n | <\/td>\n | <\/td>\n<\/tr>\n | \n<\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n<\/tr>\n | \ntotal cost of sales<\/td>\n | 626,000<\/td>\n | 626,000<\/td>\n | 751,200<\/td>\n | 500,800<\/td>\n | 626,000<\/td>\n | <\/td>\n | <\/td>\n<\/tr>\n | \ngross profit<\/td>\n | 374,000<\/td>\n | 374,000<\/td>\n | 448,800<\/td>\n | 299,200<\/td>\n | 374,000<\/td>\n | <\/td>\n | <\/td>\n<\/tr>\n | \ngp%<\/td>\n | 37.4%<\/td>\n | 37.4%<\/td>\n | 37.4%<\/td>\n | 37.4%<\/td>\n | 37.4%<\/td>\n | <\/td>\n | <\/td>\n<\/tr>\n | \n<\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n<\/tr>\n | \nselling and shipping<\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n<\/tr>\n | \nsales manager<\/td>\n | 20,000<\/td>\n | 20,000<\/td>\n | 20,000<\/td>\n | 20,000<\/td>\n | 20,000<\/td>\n | 20,000<\/td>\n | <\/td>\n<\/tr>\n | \nsales commissions<\/td>\n | 60,000<\/td>\n | 60,000<\/td>\n | 72,000<\/td>\n | 48,000<\/td>\n | 60,000<\/td>\n | <\/td>\n | 6.0%<\/td>\n<\/tr>\n | \nshipping salaries<\/td>\n | 10,000<\/td>\n | 10,000<\/td>\n | 10,000<\/td>\n | 10,000<\/td>\n | 10,000<\/td>\n | 10,000<\/td>\n | <\/td>\n<\/tr>\n | \npayroll taxes and benefits<\/td>\n | 27,000<\/td>\n | 27,000<\/td>\n | 30,600<\/td>\n | 23,400<\/td>\n | 27,000<\/td>\n | 9,000<\/td>\n | 1.8%<\/td>\n<\/tr>\n | \nadvertising<\/td>\n | 20,000<\/td>\n | 20,000<\/td>\n | 20,000<\/td>\n | 20,000<\/td>\n | 20,000<\/td>\n | 20,000<\/td>\n | <\/td>\n<\/tr>\n | \nother selling costs<\/td>\n | 15,000<\/td>\n | 15,000<\/td>\n | 15,000<\/td>\n | 15,000<\/td>\n | 15,000<\/td>\n | 15,000<\/td>\n | <\/td>\n<\/tr>\n | \n<\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n<\/tr>\n | \ntotal selling and shipping<\/td>\n | 152,000<\/td>\n | 152,000<\/td>\n | 167,600<\/td>\n | 136,400<\/td>\n | 152,000<\/td>\n | <\/td>\n | <\/td>\n<\/tr>\n | \n<\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n<\/tr>\n | \ngeneral and administrative<\/td>\n | 40,000<\/td>\n | 40,000<\/td>\n | 40,000<\/td>\n | 40,000<\/td>\n | 40,000<\/td>\n | 40,000<\/td>\n | <\/td>\n<\/tr>\n | \n<\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n<\/tr>\n | \ntotal selling, shipping, g&a<\/td>\n | 192,000<\/td>\n | 192,000<\/td>\n | 207,600<\/td>\n | 176,400<\/td>\n | 192,000<\/td>\n | <\/td>\n | <\/td>\n<\/tr>\n | \n<\/td>\n | <\/td>\n | <\/td>\n | \u00a0<\/strong><\/td>\n\u00a0<\/strong><\/td>\n<\/td>\n | <\/td>\n | <\/td>\n<\/tr>\n | \nnet income before taxes<\/td>\n | 182,000<\/td>\n | 182,000<\/td>\n | 241,200<\/td>\n | 122,800<\/td>\n | 182,000<\/td>\n | <\/td>\n | <\/td>\n<\/tr>\n | \n<\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n<\/tr>\n | \n<\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | 470,000<\/td>\n | 34.8%<\/td>\n<\/tr>\n | \nbe sales<\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | 720,859<\/td>\n | <\/td>\n<\/tr>\n | \nmonthly sales<\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | 1,000,000<\/td>\n | <\/td>\n<\/tr>\n | \nsales over break-even sales<\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | 279,141<\/td>\n | <\/td>\n<\/tr>\n | \nprofit<\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | <\/td>\n | 182,000<\/td>\n | <\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n <\/p>\n <\/p>\n | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |