How to do a expense calculation

[Lowaird1964]

Could anyone help me with doing an expense calculation. I'm trying to figure out my break even point. Thank you ahead of time

[bbdrew]

It depends on how in depth of an analysis you are looking at and what aspect of the business you are looking at i.e. wholesale will have a greater # of expenses to factor than counter or service. Some aspects of the business we will lose a little bit on one sale for a high probability of large profits on a future sale. I've always heard that break even % is a retention of 15%
I would start by examining all the variables that go into generating the sale (personnel, cost of part) if you really want to get detailed (training, fixed expenses, variable expenses (you would need access to financial statement). It's hard to help without knowing exactly what your are expensing out.

[tnpartsguy]

PARTS DEPT. BREAK-EVEN CALCULATION

Here is a method to determine what your parts department’s break-even point is based on your own department’s actual expenses being charged to your department. Rarely will two departments have the same result for this calculation, but it is important to know what your break-even point is. Ultimately, this will tell you how much (on an average) you need to mark up each part you sell in order to generate a net profit. Some parts will sell for more markup than the calculation number (retail for example); and some will sell for less than the desired markup (wholesale, internal for example). The goal is to have more parts selling for HIGHER than the break-even markup; and LESS parts selling below the break-even markup.

The first thing we need to do is determine a breakdown of your parts sales as a percentage by category. In this example, the department had total sales of $200,000 broken down as follows: 5% retail (10,000), 40% wholesales (80,000), 40% warranty (80,000), and 15% internal (30,000). Using NADA benchmark averages, the gross profit on these sales was retail (4000 or 40% gross as a percent of sale), wholesale (16,000 or 20% gross as a percent of sale), warranty (23,800 or 29.75% gross as a percent of sale), and internal (6000 or 20% gross as a percent of sale). Total gross profit was 49,800 or 24.9% gross as a percent of sales.

Now then, we are going to assume total departmental expenses to be $45,000. We now need to determine the overall break-even point for this scenario. Taking the total sales (200,000) and subtracting the total gross (49800) we arrive at a total cost of sales of 150,200. Now then, if we divide the total departmental expenses of 45,000 by the cost of sales of 150,200 this gives us a percentage of 29.96%. In other words, every part sold had to have an AVERAGE markup of 29.96% in order to offset the total expenses.

Let’s now look at each sale category and see if we actually generated a net profit on each category:
RETAIL -- 10,000 sales minus the 4,000 gross profit leaves a ‘cost of sales’ of 6,000. Multiply this cost of sales of 6,000 by the .2996 (29.96%) and we determine that the total gross on retail would have had to have been $1798.00 to “break even” on that sale category. What was our total gross profit on Retail? It was $4,000 -- meaning that we actually generated $2202 ABOVE the break-even dollar amount. YAY!! Retail generated a NET PROFIT!

WHOLESALE -- 80,000 sales minus the 16,000 gross profit leaves a ‘cost of sales’ of 64,000. Multiply this by the .2996 and we determine that we would have had to have generated total gross on wholesale of 19175 in order to ‘break even’. How did we do? At 16,000 total gross on wholesale, we actually showed a net loss on this category of $<3175>. Boo, Hiss!

WARRANTY – Our 80,000 sales less the gross profit of 23,800 gives a cost of sales of 56,200. When we multiply this by the .2996 factor, the gross profit generated in order to break even would have needed to be 16,838. Since we actually generated 23,800 in gross profit, this is another PROFITABLE sale category to the tune of $6962.

INTERNAL – With 30,000 in internal sales at a gross profit of 6,000, this yields a cost of sales of 24,000. Multiplying this by the .2996 factor yields a break-even gross amount of $7190. Since we only generated 6,000 we effectively LOST $<1190> for our efforts on the internal sales category.

This is a slightly simplistic look as it only looks at total expenses; and not what expenses are unique to each sale category. Using wholesale as an example, if this calculation method determines that you are in a NET LOSS position on wholesale, it is likely actually much worse as the majority of the expense for delivery vehicles and drivers is created by this category only.
Having seen dozens of these analyses done, the vast majority of parts departments find that they are (just like the scenario here) profitable on retail and warranty; and unprofitable on wholesale and internal. The wholesale category can be made more profitable by virtue of generating more gross profit at a faster rate than any corresponding expenses created in order to do so. This can be tough as the market and level of competition in your area can often determine and cap your selling price. On internal, this is often a dealer-mandated percentage of markup that often is nothing more than the parts department helping subsidize the sales department(s) ability to sell vehicles. The more recent trend of charging the Used Car Department retail price for parts and labor can certainly help swing this number in the other direction. Even if you are unable to convince your dealer principal to bump the internal markup percentage, via these calculations you will at least be demonstrating that you are paying attention and have proof that you are selling to the other department(s) at a net loss.
If you find that you are unprofitable in even retail and warranty, either you just are not generating enough gross to break even; or your department is saddled with an unrealistic expense structure (and hopefully it does not affect your pay!).

[57years]

Just an FYI: Do not expect any expense calculation or BE calculation you do to agree with what the Dealer Accounting has on the Company Financial statement. The FS uses percentages (set by the office management ) of fixed operation expenses and assigns them to each department. Your office or manufacturer may design the statement calculations to reflect what you think is a "sales" expense, but they assign as a "fixed" expense. Additionally, you might find an office clerk has a lot of power where she or he assigns an incoming bill, and that decision affects the outcome. Having been a multi manufacturer dealer, It always amazed me how one domestic found 100% fixed coverage as the minimum while another found 70% as "high" !

[XDCX]

Originally Posted by 57years

Additionally, you might find an office clerk has a lot of power where she or he assigns an incoming bill, and that decision affects the outcome. Having been a multi manufacturer dealer, It always amazed me how one domestic found 100% fixed coverage as the minimum while another found 70% as "high" !

This is an excellent comment and is a great reminder why Department Managers should pay attention to what gets charged to their department.

In my experience it's not uncommon to see one department get charged for something that's related to another department simply because the accounting clerk made a mistake when posting an invoice or get's lazy and uses a common account number whenever he/she encounters an invoice where the department that's responsible is not clear cut.