- 6 - 



higher the total variable costs. A good example ts th,e w&.olesale 

 cost of goods you are selling. Each time you sell one more you 

 have the initial cost of that item to cover. 



Now the important point to remember is that you have fixed 

 costs no matter how many you sell--even if you don't sell any. 

 variable costs increase proportionally. 



But 



Just to make it simple, let's assume we are only selling apples 

 The first pound of apples we sell will cover the variable cost of 

 the apple and ^0t of the $300 fixed cost. Questlon--how many pounds 

 of apples do we need to sell to exactly cover all costs? Answer-- 

 since each pound sold for 25(t contributes 10<^ to overhead, then 

 $300/. 10 - 3000 pounds of apples. That's a lot of apple pie! And 

 you would have to sell this much before you could even make one 

 penny profit. That's what we call the breakeven point. 



That was an awfully simple example. But it works about as 

 simply for a market that sells a wide variety of produce--especi al ly 

 when you think in terms of the margin you make on each dollar of 

 sales. Let's say that each item you sell is priced so that you 

 make a 40 percent margin. This means, of course, that for every 

 dollar of sales, 6Q(t, or 60 percent, goes for th,e cos,t of th^e goods, 

 and the remaining 40^, or 40 percent, is for covering overhead and 

 profit. Note that for the most part the margin you set is really 

 the same thing as the "contribution to overhead" (CTO) that we dis- 

 cussed earlier. So it is easy to calculate the amount of sales you 

 must make to break even by: 



fixed cost 

 CTO 



^^°Q = $750 sal 

 ~I0 



es 



If you cut your prices and sell at a 30 percent margin, then 

 CTO becomes 30(i; of every dollar of sales, so: 



fixed cost _ $300 ^ ^^poo 331^5 



