what is the 1 minus in this formula actual doing

[Guest]

The formula below has a "1 minus" in part of it. Does anyone know what this
means or is doing. I understand the whole formula except that.

="Base B/E = Fixed Expense ÷ (1 minus (Variable Cost ÷ Sales))"

 

[PCLIVE]

Well this is obviously a break even formula. Though this question doesn't
exactly apply as an Excel question, it the "(1 minus (Variable Cost ÷
Sales))" portion of the formula, you are subtracting the "Variable Cose
devided by Sales" from 1. Why, I don't exactly know. However the link
below may explain a little more.

https://www.agecon.purdue.edu/planner/resources/breakeven.pdf

Regards,
Paul

 

[Roger Govier]

Hi Kim

With Sales of 500,000 and VC of 300,000, then the
VC represents 300000/500000 = 60% of Sales or 0.6
In order to get the reciprocal of that, i.e. the 40% that is the Gross
Contribution from Sales, we need to subtract the result from 1 (or 100%)
so the 1-(VC/Sales) in the example above would return 0.4 or 40%.

So if Fixed Costs were 100,000 the Sales required to Break Even would be
100000 / 0.4 = 250,000