What's the Break-Even Point

In the January issue, I discussed margin management and two of the financial exercises that consultants and manufacturers use to calculate the cost to break even in the parts and service departments.

I wrote then: “Even though we aren't in the business of breaking even, I would argue that it is imperative we know our real cost of doing business. If we don't know our costs, how can we competitively price our products to ensure there is adequate gross generated to cover our overhead?”

This month I want to expand the break-even subject to include new- and used-vehicle retail sales.

I have just completed a series of meetings. One of the agenda topics was a discussion about, and the calculation of, the number of new and used vehicles that members need to sell during an average month to break even.

The exercise begins with this question: How many units do I need to sell monthly to break even?

The answer: It depends on your fixed coverage/service absorption.

As a reminder, your fixed coverage is the dollar amount of the total fixed overhead covered by the gross generated in your parts, service and body shop departments.

The total fixed overhead is the net of your total dealership expenses less your total variable expenses. So, in this example, if your fixed coverage is 60% (The average for U.S. dealers, according to the National Automobile Dealers Assn.), then your unabsorbed expense, or burden as it is commonly called, is 40% plus the total of your variable expenses.

In the chart example, our total fixed gross is $202,363 and our total fixed overhead is $337,891. By dividing the fixed gross by the total fixed overhead, we see our fixed coverage is 58.89%.

We then subtract the total of the variable expenses and unabsorbed expense from our total dealership expense which equals the unabsorbed expense, or the dollar amount of gross, we must generate through new- and used-vehicle sales and net finance and insurance. This unabsorbed expense (burden) is then divided by our total gross per vehicle to determine the number of units we must sell to break even.

Now that we've determined the number of units required to break even, let's discuss our options to decrease that number and increase our net profit proportionally.

Even though this is an exercise which could consume several columns, I'll just let you fill in the blanks.

First, we must identify the factors which influence this number: Our total dealership expenses and the individual components that total that number, our fixed gross and, our gross per vehicle retailed, which really is a two-part number comprised of our front-end gross plus our net, after charge backs, F&I PVR.

We can reduce the number required to break even by lowering our expenses, we can increase our fixed gross, we can increase our total gross per new or used retail, or, we can use any combination of the three items. Fortunately, most of you have been working on these components for the past three plus years.

As is the case with any management scenario, communication is the answer. Ensure your management team has a thorough understanding of the issue and then, in a group setting, communicate about the potential fixes. You will be well on your way toward accomplishing your goal.

Good selling!

Tony Noland is a veteran dealership consultant. He can be reached at [email protected]

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