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Luca

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3

Breakeven Point - Clarification Question

Hello!

I still don't get the difference between the two formulas for breakeven:

(1) Revenues - Costs = 0

(2) Fixed Costs / Contribution Margin

What is the difference here and what does contribution margin inherently tell us? And what are the effects of different cost structure (e.g. one company has higher fixed costs whereas the other company has higher variable costs/unit if number of units is exactly the same)? Thanks a lot!

Hello!

I still don't get the difference between the two formulas for breakeven:

(1) Revenues - Costs = 0

(2) Fixed Costs / Contribution Margin

What is the difference here and what does contribution margin inherently tell us? And what are the effects of different cost structure (e.g. one company has higher fixed costs whereas the other company has higher variable costs/unit if number of units is exactly the same)? Thanks a lot!

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Coaching mit Luca vereinbaren

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Hello,

The second formula is not something that you can use to calculate breakeven period. In order to calculate the breakeven period you should use the DCF method.

Best,
Luca

Hello,

The second formula is not something that you can use to calculate breakeven period. In order to calculate the breakeven period you should use the DCF method.

Best,
Luca

Coaching mit Francesco vereinbaren

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Hi Anonymous,

the second formula is equivalent to the first, referring to the amount of volume to reach breakeven. You can derive it as follows:

Revenues-Costs=0

p*V-c*V-FC=0

V=FC/(p-c)

As a consequence you see that:

  • If FC grows, the volume for breakeven grows
  • If (p-c) grows, the volume for breakeven decreases

Hope this helps,
Francesco

Hi Anonymous,

the second formula is equivalent to the first, referring to the amount of volume to reach breakeven. You can derive it as follows:

Revenues-Costs=0

p*V-c*V-FC=0

V=FC/(p-c)

As a consequence you see that:

  • If FC grows, the volume for breakeven grows
  • If (p-c) grows, the volume for breakeven decreases

Hope this helps,
Francesco

Coaching mit Antonello vereinbaren

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