Reverse engineering to calculate breakeven

There has been a considerable amount of discussion regarding the 4000 unit statement made in an edig communication. It was made in reference to an estimated breakeven/profit projection. This breakeven point will be a function of the type of sales and the type of revenue generated. Sales through distributors (Mezzo) will generate a lower margin than direct sales. Turnkey sales including recurring revenue from content, etc. will produce the highest margins. The combination of sales and service revenues has to be used in the calculation of any estimate of gross margin.

Based on the following scenario we can estimate the number of units required to achieve a breakeven without having to consider the above revenue complexity.

Three separate calculations are shown, based on the last quarter and fiscal year data values.

1) Total operating cost including

selling, administrative, research

and other expense in thousands:           $3,000      $3,500   $4,000

2) Gross Margin to breakeven               3,000       3 ,500     4,000

3) Revenue yielding 30% margin          10,000      11,667   13,333

4) Gross margin/unit @4000 units            750            875     1,000

5) Revenue/unit @4000 units                2,500         2,917     3,333

The higher the ratio of distributor sales, the lower the margin and the average probably will be less than 30% as the latest quarter indicated, which had a gross margin of 14%, 68%, and 19% respectively for sales, service and the total.  To achieve an average of 30% margin, used in the above calculations, a significant amount of revenue would have to be derived from direct sales and service revenue.

The last quarter results and a backlog of increased revenue are certainly going in the right direction towards accomplishing the targets set by management a year ago.  Based on the above scenarios, it is doubtful if the 4000 unit number is adequate to achieve a breakeven, however it’s academic if we continue to see improvement on a quarter by quarter basis. The numbers above suggest a unit revenue of $2500 to $3333 must be attained and a margin of $750 to $1000 if we use the 4000 units to satisfy the original statement. It would appear to be more realistic to use 6-8ooo units yielding more reasonable per unit gross margin and revenue values.

Just food for thought and discussion.