Thread: Break-even point to get company back to profitability

Background info: Profits are at a loss of $10M. Revenue=$30M and Cost=$40M. Variable Costs=$25 M and Fixed Cost=$15M.

"From an operating standpoint, looking at this it looks like for every $30 million in sales we subtract out the labor costs or the variable costs and we make about a $5 million profit before we have to pay for the overhead. And let’s see, so it looks like, to get this company back to breakeven we need to come up with a $5 million profit somehow. So either we need to cut these costs by $5 million or if we can’t change pricing we’d have to increase sales to say $60 million, which would put us at a $5 million in profit before overhead."

I don't understand the bold-faced part. I understand he's looking at this from an operating standpoint, but to get company back to break-even, how can you ignore fixed costs?

Hey phi1234.

What do you define as overhead? Also is profit in this case just revenue - total costs?

Overhead is fixed costs. Profit=Revenue-Total costs. As a result, I just don't understand how you're able to ignore fixed costs when calculating the break-even point. Wouldn't you need to get the number of units sold in order to calculate it? Thanks!

The idea of fixed costs means that you include the same figure regardless of how many units you sell (even none). The variable cost is a function of how many units you sell.

Yes, but I was under the impression that break-even point is Fixed Cost/Gross Margin per Unit. Wouldn't you need to make $10 M in profit to get back to break-even, not $5M?

Since I'm not in your class, I'll ask what the formula is for final net profit as well as that for all sub-elements like variable costs as a function of the number of units.