MKT500: Breakeven – Determining Your Costs

Companies have a variety of costs with which they grapple. To keep things simple, we will look at Variable Costs (VC) and Fixed Costs (FC).

The combination of VC and FC = TOTAL Costs. In effect, VC + FC = TC.

What's a Fixed Cost (FC)? Fixed costs (FC) are costs that do NOT vary as your sales volume increases or decreases. Whether you sell one widget or 50,000 widgets, these are known costs that your company will have to pay regardless of volume of widgets sold.

Fixed Costs (FC): These might include fixed staff salaries, lease/rent, debt service, insurance -- in effect, any KNOWN cost that will remain constant, e.g., your insurance premium for 12 months is $12,000… or $1,000 for each and every month. Whether you sell many widgets or sell nothing, you still have to pay that monthly insurance premium, monthly lease/rent, salaries!

Variable Costs (VC): These increase linearly as your sales increase or decrease. Some examples of Variable Costs (VC) that companies have include raw materials and thus the cost of goods sold, sales commissions, shipping charges, delivery charges, hourly salaries and overtime, costs of direct materials or supplies and direct labor. Thus, an increase in widgets manufactured might necessitate more plastic moldings, more gizmos, possible overtime, more electricity to run the equipment that is used to manufacture the widgets, etc. Each additional widget manufactured increases your overall variable costs.

Unit Contribution: A minimal expectation is typically that a product will generate enough revenue to cover its variable costs and make a contribution toward offsetting the fixed costs of a firm. The revenue generated by each unit sold is referred to as unit contribution (UC), or as contribution margin (CM). Within a targeted period of time, often the first year or two,