Reviewing a company’s financial statements does not always offer an accurate depiction of how a business is performing. Useful analysis techniques have been developed to help offer a more complete picture of a company’s financial health. The break-even point, contribution margin and reviewing fixed and variable costs are all important analysis tools in helping to determine where a company stands and at what point the company will begin to realize a profit.

To properly asses a company’s financial health, useful analysis techniques will include a review of fixed costs, variable costs, the break-even point and the contribution margin. These analytical tools are only a few that can be used to gauge how a company is doing. A break-even analysis is based on fixed costs, variable costs per unit of sales and revenue per unit of sales.

Fixed and Variable Costs

Fixed costs are those costs that are always present, regardless of how much or how little is sold. Some examples of fixed costs include rent, insurance and salaries. Variable costs are the costs that increase or decrease in proportion to sales. Some examples of variable costs are raw materials, delivery expenses and sales commissions.

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