A second tool for management decisionmaking that has grown out of cost/volume/profit analysis is breakeven analysis.
Once you know what yourvariable costs are, as well as your overall fixed costs for the business, you can determine your breakeven point: the volume of sales needed to at least cover all your costs. You can also compute the new breakeven point that you'd need to meet if you decided to increase your fixed costs (for example, if you undertook a major expansion project or bought some new office equipment).
Your breakeven point can be determined by using the following formulas:
In the example above, a 25 percent increase in sales from 80,000 loaves to
100,000 loaves would produce an increase in profits from $7,000 to $21,000.
Similarly, a small drop in sales below breakeven would produce a substantial
increase in loss. How is this explained? There is obviously more involved than
simply trying to determine the breakeven point. In the next section, we'll show
that the concept of operating
leverage explains why the mix of fixed and variable costs can have a large
effect on your profit levels, as your sales volume increases and decreases.