ECONOMICS

Detailed explanation-1: -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.

Detailed explanation-2: -Assume a company has $1 million in fixed costs and a gross margin of 37%. Its breakeven point is $2.7 million ($1 million ÷ 0.37). In this breakeven point example, the company must generate $2.7 million in revenue to cover its fixed and variable costs. If it generates more sales, the company will have a profit.

Detailed explanation-3: -Decreasing a company’s fixed expenses should reduce the break-even point. The contribution margin per unit is the selling price per unit minus the fixed expenses per unit. The contribution margin is selling price per unit minus VARIABLE expenses per unit.

Detailed explanation-4: -In general, a company with lower fixed costs will have a lower break-even point of sale. For example, a company with $0 of fixed costs will automatically have broken even upon the sale of the first product assuming variable costs do not exceed sales revenue.