Break-even Analysis

One way to look at a spending decision in one's business is to determine how much the company sales have to increase in order to pay for the amount one wishes to spend.  For example if you're making a $30,000 hiring decision and your contribution/gross margin is say 50% the company's sales will need to increase $60,000 in order to "break-even" on the decision.  In other words
 if the company spends $30,000 they will make a profit on additional sales over $60,000.  Anything under the $60,000 sales target will create a reduction in net profit based on the decision. 

Proof of above example:

Additional Sales       $60,000
Labor/Product Cost (30,000)
  Gross Margin 50%  30,000
Less: New expense   (30,000)
     Break-even          $      -0-

Break-even analysis is just one tool to help with the spending decision.  Another consideration is how different customers define value.  If you have clients who value service and your spending decision will enhance the customer service relationship then incurring the additional expense has the potential to pay for itself over time.  One must be careful to avoid incurring selling expense for activities that are not tied to issues that the customer regards as important.  Additional selling expense are harder to recoup when your sales are made largely on the basis of price.

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