Finance tip 2 - How much sales is required to make a profit?

How does a company calculate the sales value or quantity that is required to make a profit?

All the companies have fixed costs. These will not usually change whatever the circumstances are. Examples are salaries, office rent and License fees.

Some companies also have variable costs. Cost of goods sold is variable cost because it changes based on sales.

A typical account of a trading company is as follows:

Items sold – 5
Price – 20
Sales – 100
Less Cost of goods sold – 70
Gross Margin – 30

If the fixed costs of the company is 30, it will break-even. When the company starts selling more than 5 items, it will make profit. However this figure will vary if there is a change in the gross margin or price.

It is important for a company to calculate its break-even sales. The company should keep a simple Excel template to update break even sales in case of changes to the price or gross margin.

Do you need the excel template? Email us – info@mideastaccounting.com