Breaking even, part 2.
The formula for the break even point that we showed you in the March issue tells you the revenue you need, to sell to cover direct costs and overhead, but it doesnt include profit. If you recall, the break even formula was:
Break even sales = Overhead dollars/Gross margin percentage
$500,000 = $150,000/.30
When you reach a sales volume of $500,000, your overhead is covered. Remodelers use this figure as part of their financial analysis to formulate a business strategy. If you want to calculate sales needed to cover both overhead and achieve profit goals, the formula is:
Break even with profit = Overhead dollars + profit goal/Gross margin percentage
$600,000 = $180,000/.30 = $150,000 + $30,000/.30
You need $500,000 for your break even, but with the next $100,000 in sales volume, you produce the 5% planned profit.
There is an incremental increase in overhead as sales go beyond the break even point, but it is not worth worrying about unless additional personnel are added to overhead payroll.
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