By Craig A. Shutt
A breakeven analysis determines when your expenses, including both fixed and variable, have been met and the company is making a profit. The sooner in the year you reach that point, the more successful the company has become. The breakeven point is derived by dividing contribution margin (the amount of profit per job available to pay toward fixed expenses) into fixed expenses.
Here’s an example provided by Clay Nelson, president of Clay Nelson Life Balance, a division of Consulting Services Network LLC:
- ABC Remodeling has annual fixed expenses totaling $100,000.
- The average contract amount is $15,000.
- The average margin on projects is 28 percent.
First, figure the average dollar contribution margin per project:
$15,000 x .28 = $4,200
Then figure the breakeven point:
$100,000 x $4,200 = 24 contracts required
ABC Remodeling therefore must complete 24 jobs at an average sales price of $15,000 and a minimum margin of 28 percent to break even for the year.
If the average number of jobs that must be completed is unreasonably high, you must take steps to change that, Clay stresses. The options include raising your margin—which many remodelers can do but fear doing—or decreasing the variable cost of the jobs. On the other side, you can decrease your fixed costs by cutting back on office expenses or staff—remembering that some cuts may affect your service abilities, impacting your customer satisfaction and future sales.
| 
