How to reduce the break-even point
/What is the Break-Even Point?
The breakeven point is the sales volume at which a business earns exactly no money. At this point, a business is able to cover its fixed expenses, allowing it to remain in operation. If a business is operating below its breakeven point, then it is continually losing money. Operating above the breakeven point means that a business is generating a profit.
The break-even point of a business should be kept as low as possible, in order to keep the firm profitable even when sales decline. There are several ways to reduce the break-even point, as noted in the following points.
Reduce Fixed Costs
The typical company has many fixed costs, such as periodic rent payments, the salaries of administrative staff, and underutilized production equipment. By reducing these costs, the firm needs fewer sales to cover the remaining fixed costs.
Reduce Variable Costs
The break-event point can be reduced by increasing the average contribution margin earned on each sale. One way to do so is to reduce variable costs. One approach is to redesign products to reduce costs. Another option is to standardize components across product platforms, in order to obtain volume purchase discounts. Yet another possibility is to increase the reliability of products, so that they require fewer warranty repairs.
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Improve the Sales Mix
Another way to improve the contribution margin is to sell a higher proportion of goods and services with higher contribution margins. This can be done by altering marketing activities to favor high-margin products, as well as by increasing commissions on high-margin items.
Increase Prices
Yet another way to improve the contribution margin is to set higher prices. This approach only works if customers are not especially sensitive to price increases; otherwise, they will buy elsewhere, resulting in a net reduction in sales. Increasing prices is a better option when the company is seen as a high-quality provider or the products are heavily branded.
Summary of Break-Even Reduction Activities
In reality, it is not that easy to reduce the break-even point. Cutting fixed costs may reduce a firm’s production capacity, while heavy competition may prevent one from increasing prices. Consequently, the actions taken will depend on the circumstances of both the business and the market. Certainly, though, one must have a deep knowledge of the cost structure of a business in order to reduce the break-even point.