By Ben Hollister, CPA, CMA
Breakeven point of multiple product lines are the equilibrium point where total revenues equal total expenses for a business based on a particular mix of sales and product lines. It is a dynamic number. It never stays the same.
Do you know the break even point for your multiple product lines?
The Breakeven Point is the level of output at which total revenues equal total expenses. This is the point where operating income is zero.
Lets assume you are selling multiple products. What would be your new break even point be if individual product sales accounts for 30% & 70% of the total revenues, and variable costs are 30% and 40% of the total individual product revenues, respectively. Total fixed costs are $63,000.
Revenues = Fixed Costs + Variable Costs
Revenues(R) = $63,000 + .30(.30R) + .70(.40R)
Revenues(R) = $63,000 + .09R + .28R
.63R=$63,000
R=$100,000 is amount of revenues required to breakeven for this example - so to "prove" this example:
Sales Variable Costs Gross Profit
Product A $30,000 $ 9,000 $21,000
Product B $70,000 $28,000 $42,000
Totals $100,000 $37,000 $63,000
Fixed Costs $63,000
Profit $ -
Note that whenever a part of the breakeven "formula" changes the resulting breakeven point changes. Here is a quick example of the 2 product calculation if the sales mix changed by 5% more sales to product A.
Revenues = Fixed Costs + Variable Costs
Revenues(R) = $63,000 + .35(.30R) + .65(.40R)
Revenues(R) = $63,000 + .105R + .26R
.635R=$63,000
R=$99,213 is amount of revenues required to breakeven for this example - so to "prove" this example:
Sales Variable Costs Gross Profit
Product A $34,725 $10,417 $24,307
Product B $64,488 $25,795 $38,693
Totals $99,213 $36,213 $63,000
Fixed Costs $63,000
Profit $ -
A 5% increase in sales of product A resulted in a 1% drop in the amount of total sales needed to breakeven. Based on this scenario, a company should try to increase product A's portion of sales since it contributes more towards the bottom line to breakeven.
Note that whenever a part of the breakeven "formula" changes the resulting breakeven point changes. What if the 2 product calculation's fixed costs also increased by $20,000.
Revenues = Fixed Costs + Variable Costs
Revenues(R) = $83,000 + .30(.30R) + .70(.40R)
Revenues(R) = $83,000 + .09R + .28R
.63R=$83,000
R=$131,746 is amount of revenues required to breakeven for this example - so to "prove" this example:
Sales Variable Costs Gross Profit
Product A $39,524 $11,857 $27,667
Product B $92,222 $36,889 $55,333
Totals $131,746 $48,746 $83,000
Fixed Costs $83,000
Profit $ -
With a similar sales mix to the initial example above, a $20,000 increase in fixed costs require the company to increase its total sales by 32%.
The breakeven point examples above are multi-product scenarios. These examples use a weighted average of total sales (not contribution margin per unit) to determine the breakeven mix. (See segment 1 for breakeven calculations per unit.) Breakeven point calculations can become very complex depending on the amount of information available. However, it is very important to determine your breakeven point when adding a new product line or for monitoring an ongoing business. Upcoming segment of breakeven: Absorption Costing