Assume that the financial statements for Lillian's Bakery indicate that the bakery's fixed costs are $49,000, and its variable costs per unit of production (loaf of raisin coffee cake) are $.30.
Further assume that its sales revenue is $1.00 per loaf. From this information, it can be determined that, after the $.30 per loaf variable costs are covered, each loaf sold can contribute $.70 toward covering fixed costs.
Dividing fixed costs by the contribution to those costs per unit of sales tells Lillian's Bakery at what level of sales it will break even. In this case: $49,000/$.70 = 70,000 loaves.
As sales exceed 70,000 loaves, Lillian's Bakery earns a profit. Sales of less than 70,000 loaves produce a loss.
Lillian's Bakery can see that a 10,000 loaf increase in sales over the breakeven point to 80,000 loaves will produce a $7,000 profit, and a 30,000 loaf increase to 100,000 will produce a $21,000 profit. On the other hand, a decline in sales of 10,000 loaves from breakeven to 60,000 loaves will produce a loss of $7,000, and a 30,000 decrease from the 70,000 breakeven point produces a $21,000 loss.