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46 International Door & Operator Industry™ Alternatively, if you assume each month is a discreet cost and revenue period, breakeven occurs about halfway through the 25th day of each month. In short, the majority of most business effort is spent covering expenses, with only a fraction of any business period actually yielding profts. This fact is the reason why all frms are dangerously susceptible to recessions, and why astute management constantly examines market opportunities to improve Gross Margins. To verify that the preceding calculations are accurate, we can multiply the difference between actual and breakeven volume by the GM% to see if it yields the same EBITDA displayed on the income statement: Proof: = Actual Sales $ 3,400,000 minus Breakeven 2,847,130 = Marginal Revenue 552,870 X GM% (as decimal) .3382 = EBITDA $ 187,000 EBITDA from Exhibit 4 is indeed equal to the residual of the breakeven calculation, i.e., the breakeven formula works! Enhancing Breakeven by Differentiating Expense Earlier, we discussed the fact that some "avoidable" expense can be controlled or eliminated for short durations to allow management to adapt the frm to changing or deteriorating market conditions. Again, recall what you did to survive the downturn in construction spending from 2008 through early 2011. Variable operating expense is therefore more manageable and has less absolute impact on the breakeven point than does inescapable or "fxed" expense. In short, Up&Down;'s breakeven volume MANAGEMENT (continued from page 44) is a bit lower than calculated above if we separate variable expense from fxed expense, and state variable as a percent of sales. Using the data in Exhibit 5, the following calculations provide a more accurate, applicable and sophisticated rendition of Breakeven Analysis: Inescapable Operating Expense $ $ Breakeven Volume = (Exhibit 5, line 5) GM % of Sales minus Variable Expense % of Sales (Exhibit 5, line 3) (Exhibit 5, line 6) $ 725,000 $ Breakeven Volume = (Exhibit 5, line 5) .3382 minus .07 (Exhibit 5, line 3) (Exhibit 5, line 6) $ 725,000 $ Breakeven Volume = Inescapable Op Expense .2682 GM% minus Variable% $ Breakeven Volume = $ 2,702,851 79.5% of actual 2012 volume The breakeven point is lower than originally calculated because we have allowed for greater managerial expense control, which is a more realistic view of the business environment. The calculation "proof" remains valid, albeit the GM% must be modifed by the variable expense percentage of sales: Proof: = Actual Sales $ 3,400,000 minus Breakeven 2,702,851 = Marginal Revenue 697,149 X GM% (as decimal) .26824 = EBITDA $ 187,000 Continued on page 48 1/24/14 10:51 AM