You need three items of QuickBooks data in order to perform profit-volume-cost analysis: sales revenue, gross margin percentage, and fixed cost. Typically, these items of data aren’t difficult to find if you’ve been using QuickBooks. Nevertheless, this data doesn’t map perfectly to line items that appear on a QuickBooks income statement.

Sales revenue

The sales revenue levels probably represent possible or maybe even likely sales revenue levels for your business. Accordingly, the sales revenue levels don’t really come from QuickBooks. However, the formula inputs are probably just rough estimates; they don’t actually come from a QuickBooks income statement.

Gross margin percentage

The gross margin percentage is calculated by subtracting your variable costs from your sales revenue and then by dividing that result (which is the gross margin) by the sales revenue. The variable costs include the costs of the items that you sell: inventory, commissions, shipping, and similar costs.

Because calculating the gross margin percentage can be a little bit confusing the first few times you use it, here are a couple of examples to review:

  • Boat building: If you sell $100,000 boats, but the material, labor, and commission expenses for those boats total $40,000, you can calculate the gross margin percentage by using the formula: ($100,000 – $40,000) ÷ $100,000. That formula returns 0.6, or 60 percent, which is the gross margin percentage of the boat-building business.

  • Tax return service: For another example, assume that you’re running a tax return preparation service where you charge $200 for a small business tax return and that the only variable cost is a $40 fee paid to the tax software company for the return.

    In this case, you calculate the gross margin percentage by using the formula ($200 – $40) ÷ $200. This formula returns the value 0.8, or 80 percent. In this case, 80 percent is the gross margin percentage for your tax return preparation business.

The key point is that variable costs vary with the sales revenue. If a sale occurs, the sale produces variable costs. If no sale occurs, no variable costs are incurred.

So what does all this mean? Well, typically, the variable costs equal the cost of goods sold number that’s shown on your QuickBooks income statement.

Fixed costs

Fixed costs include all your other non-variable costs. Fixed costs include items such as rent paid on an office or factory, salaries paid to permanent employees, overhead for insurance, and so forth.

To see how fixed costs work and get calculated, return to the examples of the boat-building business and the tax return preparation service:

  • In the boat-building business, the firm carries an overhead of over $160,000. This amount may include $80,000 for the shop in which you build your boats and $80,000 for the salaries that you pay to two craftsmen whom you continue to employ whether or not you have boats to build. In this case, then, these overhead costs constitute your $160,000 of fixed costs.

  • In the tax return service, your only fixed expenses are $100 a month for Yellow Pages advertisements and $700 a month to rent a small office. In this case, then, your fixed costs equal $800 a month.