Break Even
Volume Calculator
The break even volume calculator
Gain valuable insight into how price increases and price decreases impact your overall profitability.
“Should we raise or lower prices?” I’m asked this often. Although the answer is quite complex, one tool that can help you make the decision is the Breakeven Volume Chart.
If you raise prices, you expect to sell fewer units. If you lower prices, you expect to sell more. Which, if either, should you do? My simplistic answer is you should change your price if you will make more profit. The Breakeven Volume Chart helps you answer that specific question.
Here comes a little algebra.
Feel free to skip to the usage section below if you’re not interested in where this chart comes from.
We know P1, P2, and Q1. Let’s create a formula that tells us Q2. In other words, how many units do we need to sell at P2 to make the same profit we were making at P1. Hence, Breakeven Volume. A lot of algebra gets us to this formula:
The says the percentage change in units we need to sell is a function of the percentage change in price and the starting contribution margin. Contribution margin is similar to gross margin, but only considers the variable costs.
CM = (P1-c)/P1
There are two ways to use this. First you can simply plug the numbers into the formula. Imagine you are considering lowering your price 20% and you have a 60% contribution margin. Plug in -.2 for DP% (it’s minus because you are lowering price) and .6 for CM. Do the math and you get 50%. This means you have to sell 50% more units to make the same profit you made before changing the price. If you sell more than 50% more, you are making more profit.
The same things works for a price increase, but this time use +.2 for the DP%. Still assuming 60% contribution margin yields -25%. This means you can lost 25% of your unit sales and make the same profit. If you lose less than 25%, you are making more profit.
You may be thinking, “thanks Mark, but I really hate math. I don’t plan on ever using that formula.” For you, we created a table. We just did the math for you. Simply go to the column that most closely represents your contribution margin. Go down to the row that represents the size of the price change under consideration. Where that column and row intersect you will find the volume you need to sell to make the same profit. It’s that easy.
You can download the Breakeven Volume Chart spreadsheet here. It includes the table as described, and it includes an easy way you can use the formula if you’d like.
