How much can the company afford in salary costs and still break even?A company has annual sales of $320,000, a gross margin of 25% and the other variable costs amount to 10% of sales. The fixed...

How much can the company afford in salary costs and still break even?

A company has annual sales of $320,000, a gross margin of 25% and the other variable costs amount to 10% of sales. The fixed annual costs amount to $90,000. The only other costs are assumed to be a monthly consultancy fees of $1,000 and the salary.

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justaguide | College Teacher | (Level 2) Distinguished Educator

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The company has annual sales of $320000, a gross margin of 25% and the other variable costs amount to 10% of sales. The fixed annual costs amount to $90000. The maximum amount that the company can give out as salary has to be determined assuming that the only other costs are monthly consultancy fees of $1000 and the salary.

The cash inflow of the company is the gross margin of 25% on the sales of $320000 which is $80000. The variable costs are 10% of the sales or $32000 and the fixed annual costs are $90000. Adding the two gives $122000. This is greater than the cash inflow of $80000. With the current margins in the sales and the fixed and variable costs the company is making a loss. To break even the company has to either increase net sales margins or decrease the fixed and variable costs. The monthly consultancy fees of $1000 are increasing the losses made. The present financial position of the company does not allow it to pay out anything in terms of salary.

The company is making a loss with the costs that are incurred excluding the salary; it does not have the financial resources to pay anything as salary and still break even.

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