You should know about the contribution margin at the break-even point, which would help your business to get an idea about the break-even point, and you can motivate your employees to get more than the break-even point. By calculating the contribution margin, you can easily get an idea of the profit percentage of the organization. You can take necessary steps to gain profit by selling your goods. In this blog, you will learn about the contribution margin at the break-even point and the necessity of this in business.
What is the Break-Even Point and its Importance?
Your business will face a situation in which the cost of the total product is the same as the total revenue earned, which is known as the break-even point in business. This situation means you do not earn any profit and loss in your business. It helps the organization to decide on a proper sales target. Break-even point can be calculated using the formula that is.
The Break-Even Point formula = Fixed Costs/(Sale Revenue – Variable Cost).
One Example of Break-Even Point.
- Let the Fixed Costs be $10,000.
- Keep the Sales Revenue is $50.
- And Variable Cost is $30.
- Break-Even Point value will be $10000/($50-$30) = $50.
The Benefits of the Break-Even Point are.
- Pricing Plan: After knowing the break-even point in your production process, you can set future sales targets and make an important pricing plan for your products.
- Avoid Future Issues: Easily know the financial risks that take place during the production process, and take some necessary steps to avoid this type of issue in the new project.
- Decision for New Product: This would help you to make important decisions related to selling the new product in the market and entering the market for the first time.
- Financial Management: You can easily know in which part of your production process you’re wasting money, and can be reduced to reach the break-even point quickly.
What is the Contribution Margin at the Break-Even Point?
Contribution margin is the amount of money remaining after paying the variable cost. It is the amount that is given by the customer so that it can help them generate profit. It can also be found by removing the variable cost from the gross profit earned. To calculate the contribution m+argin formula used.
Contribution Margin Formula = Revenue Earned – Variable Cost.
The break-even point occurs when the contribution margin dollar becomes equal to the fixed cost dollar. To earn profit in business, you have to increase the contribution margin dollar from the fixed cost dollar. Before calculating the contribution margin at the break-even point, you have to do one most important task, which is just separate the business expenses into two parts, namely variable cost and fixed cost, so that you will not face any difficulty during the calculation process.
Contribution Margin Example.
- A Company sells a pen for $70.
- The Variable Cost of that product is $20.
- Contribution Margin will be $70 – $20 = $50.
Importance of Calculating Contribution Margin at the Break-Even Point
Calculating contribution margin is an essential part of every business to get a proper visualization of the business’s sales in a period. This report will help them take an important step to increase the business sales percentage. Some of the important features of calculating the contribution margin for a business are.
- Easy Analysis: Using the contribution margin, you can know which product has provided a lot of profit to the business. So that you can make the necessary decision to increase the sales of the product in the future market.
- Cost Increment: By only looking at the gross profit, you can combine the sales amount with the profit earned. When you see that the contribution margin decreases due to the increasing sales velocity. You can suddenly increase the price of the product and decrease the variable product cost.
- More Profit: If you see that more than one product is having more sales than you imagined, than you can increase the price of the products to get more profits.
- Wrong Report: If you don’t calculate the contribution margin properly, then it may lead to creating a wrong sales report of the business for a period.
How to Improve the Contribution Margin at the Break-Even Point?
As we know, an increase in contribution margin is really necessary for a business to gain profit in its production process. So, to improve this process, you have to follow this.
- You can find other methods to increase the revenue earned by selling the goods and decrease the cost of resources that are mainly used for the production process.
- A regular customer will help you to know the problem that is present in our product, and it will help you to know how to solve this issue to attract more customers to gain more profit.
- Suggest to them better products that they are searching for in the store. You can also give an idea of which product will work better with this product to increase sales.
- If they are buying many items together, then provide them with a proper discount or gift so that they will visit the store again.
- If your margin rate is lower than you can increase the price of the good and slightly keep aware of the substitute product price.
- Give more training to employees so that they can use the advanced tools in the business to increase the production process.
- An automatic working tool will reduce labor costs and save time.
Conclusion
I am quite sure that after reading this blog, you have completely understood the contribution margin at the break-even point. What step can be taken to improve the production process? This article will not only help you maintain your break-even point, but also help you gain the contribution margin. If you have any queies then contact with us proadvisor team.