Break Even Calculation Using Percentages

In module 3 we calculated the Break Even Point as

Fixed costs divided by the contribution per unit and this told us the number of units we need to sell to break even.

To calculate the Break Even Point with percentage contribution rates, we need to do things a little different and we’ll get a difficult type of answer.

First we replace contribution per unit with the contribution margin percentage.

Second when we divide the contribute margin percentage or contribution rate into fixed costs we calculate the Break Even Sales Value.

Our Break Even Point shifts from a number of units to a value for sales.

An Example Of Calculating the Break Even Point With Contribution Percentages

If fixed costs are 10,000 and the contribution rate is 30%, then…

The break even sales value is £33,333…

Because £33,333 sales at 30% gives us a £10,000 total contribution.

I train people with the units measure first because it is easier to understand the dynamics of changes to volume, prices and costs per unit.

Beware Contribution Rates And Price Changes

The contribution percentages are confused by sales price changes and even after 30 years, I still have to revert to the calculator and then check it again.

If you reduce prices by 10% on a product originally with a 30% contribution margin, the new contribution margin is 22.2% not 20%

The contribution was 30 minus 10 for the sales price reduction that makes 20 now

The sales value was 100 minus 10 for the sales price reduction and becomes 90

20/90 is 22.2%

You lose intuitive feel so I recommend using some kind of unit measure wherever possible or a price monitor to allow you to adjust the contribution percentage.

Return to P1M4 Four Ways To Increase Profit

Twitter Digg Delicious Stumbleupon Technorati Facebook Email

No comments yet... Be the first to leave a reply!

Leave a Reply