![]() ![]() When selling lemonade from a stand, the costs of the water, lemon juice, sweetener, ice, and serving glass are all variable costs that will recur with each item sold. It requires you to understand the variable costs for an item, or those costs that are directly tied to producing a new unit. Of course, in business this is generally more complicated. ![]() In a simple example, if you were to buy a candy bar for 75 cents and resell it for $1, then the contribution margin would be 25 cents-the amount not consumed by cost. Contribution MarginĬontribution margin is the portion of revenue that is not consumed by variable cost. The more miles you drive, the more your gas expenses go up-such costs vary with the level of activity.īefore we turn to the calculation of the break-even point, it’s also important to understand contribution margin. For your car, your variable costs are things like gas, maintenance, or tires because you only incur these costs when you drive your car. Variable Costs are volume related and are paid per quantity or unit produced. If you own a car, then your car payment and insurance premiums are fixed costs because you pay them every month whether you drive your car or not. They are things such as salaries or rents paid per month. Fixed Costs are expenses that are not dependent on the amount of goods or services produced by the business. In order to grasp the concept of breakeven, it’s important to understand that all costs are not created equal: Some are fixed, and some are variable. No matter how a company expresses its break-even point, it is still the point of zero income or loss. Thus the break-even point is that level of operations at which a company realizes no net income or loss.Ī company may express a break-even point in dollars of sales revenue or number of units produced or sold. ![]() A company breaks even for a given period when sales revenue and costs incurred during that period are equal. ![]()
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