Whenever
a person starts a new business the first question that arises in his mind is
that when his business going to make a profit? To be honest, it is nearly
impossible to predict the exact amount of company’s sales and profits as there
are many different kinds of products of the company, also has many customers of
varying demand, and the amount of interaction between the price, promotion and
number of units sold also varies.

Despite
of all these challenges that the company face in the real world, the financial
experts and analysts have discovered a technique called a break-even point or
break-even analysis that could somehow be used to answer the queries of
yours.

**Breakeven Point:**

The
breakeven point of any company is that point at which the company’s sales could
exactly cover its expenses. At this point, the company does not earn any money
at all. If the sales increase from that particular point, then the company will
earn a profit, and if the sales decrease from the breakeven point then the
company will face loses.

**Advantages of Calculating Breakeven Point:**

There
are certain situations in which calculating the breakeven point could prove to
be of real use. Some of them are:

- · The maximum amount of profit that the company could generate could be calculated after calculating the breakeven point as after that point the remaining capacity could be utilized in making profits.

- · The effect that replacing a variable cost with a fixed cost can create on the company’s profits could be determined

- · The increase or decrease in the profits because of the change in the product price could be measured.

·
The company can
also measure its ability to bear the extent of loss in case of low sales.

**Calculation of the Breakeven Point:**

The
experts have developed a simple formula to calculate the breakeven point. It
can be calculated by simply dividing the total fixed expenses with the
contribution margin. To get the contribution margin, you need to divide the
sales minus variable costs by total sales. Therefore, the formula for the
breakeven point could be:

To
get the more precise and accurate breakeven point, the company should remove
the non-cash expenses such as depreciation while calculating the total fixed
expenses of the company.

**Example:**

Let
us suppose that a company A wants to buy the company B but, before that it want
to know the breakeven point of company B so that the profit margin could be
known. The information about company B that is available is as follow

Maximum
Sales Capacity $5,000,000

Operating
expenses 1,750,000

Average
Sales 4,750,000

Gross
margin percentage 35%

Breakeven
Point $5,000,000

Revised
breakeven level $3,929,000

So,
from the given information, it is quite clear that the breakeven point of
company B is very high and hence the opportunity of earning the profits is very
less. The next step that company A can take is to try to find out the margin by
using which the breakeven point can be declined.

**How to Reduce the Breakeven Point:**

Any
of these measures could reduce the breakeven point:

·
Reviewing the
fixed and variable cost on continuous basis so that any excessive costs could
be removed

·
The product
margins should be reviewed and those with highest margins should be sold more

·
Outsourcing the
activity with higher fixed cost would turn the cost into per unit variable cost
which is comparatively lower and hence help in reducing the breakeven point

·
The price
reduction strategy could be useful at times, but it also increases the
breakeven point. Try to reduce it by eliminating any type of coupons or other
offers by the company.

Hence, it is really important for the company
to find the breakeven point and should try to keep it as much lower as it can
so that the chances of earning profits increase.