Definition of Break Even point:
Break even point is the level of sales at which profit is zero. According to this definition, at break even point sales are equal to fixed cost plus variable cost. This concept is further explained by the the following equation:
[Break even sales = fixed cost + variable cost]
The break even point can be calculated using either the equation method or contribution margin method. These two methods are equivalent.
Equation Method:
The equation method centers on the contribution approach to the income statement. The format of this statement can be expressed in equation form as follows:
Profit = (Sales − Variable expenses) − Fixed expenses
Rearranging this equation slightly yields the following equation, which is widely used in cost volume profit (CVP) analysis:
Sales = Variable expenses + Fixed expenses + Profit
According to the definition of break even point, break even point is the level of sales where profits are zero. Therefore the break even point can be computed by finding that point where sales just equal the total of the variable expenses plus fixed expenses and profit is zero.
Example:
For example we can use the following data to calculate break even point.
Sales price per unit = $250
variable cost per unit = $150
Total fixed expenses = $35,000
Calculate break even point
Calculation:
Sales = Variable expenses + Fixed expenses + Profit
$250Q* = $150Q* + $35,000 + $0**
$100Q = $35000
Q = $35,000 /$100
Q = 350 Units
Q* = Number (Quantity) of units sold.
**The break even point can be computed by finding that point where profit is zero
The break even point in sales dollars can be computed by multiplying the break even level of unit sales by the selling price per unit.
350 Units × $250 Per unit = $87,500
Contribution Margin Method:
The contribution margin method is actually just a short cut conversion of the equation method already described. The approach centers on the idea discussed earlier that each unit sold provides a certain amount of contribution margin that goes toward covering fixed cost. To find out how many units must be sold to break even, divide the total fixed cost by the unit contribution margin.
Break even point is the level of sales at which profit is zero. According to this definition, at break even point sales are equal to fixed cost plus variable cost. This concept is further explained by the the following equation:
[Break even sales = fixed cost + variable cost]
The break even point can be calculated using either the equation method or contribution margin method. These two methods are equivalent.
Equation Method:
The equation method centers on the contribution approach to the income statement. The format of this statement can be expressed in equation form as follows:
Profit = (Sales − Variable expenses) − Fixed expenses
Rearranging this equation slightly yields the following equation, which is widely used in cost volume profit (CVP) analysis:
Sales = Variable expenses + Fixed expenses + Profit
According to the definition of break even point, break even point is the level of sales where profits are zero. Therefore the break even point can be computed by finding that point where sales just equal the total of the variable expenses plus fixed expenses and profit is zero.
Example:
For example we can use the following data to calculate break even point.
Sales price per unit = $250
variable cost per unit = $150
Total fixed expenses = $35,000
Calculate break even point
Calculation:
Sales = Variable expenses + Fixed expenses + Profit
$250Q* = $150Q* + $35,000 + $0**
$100Q = $35000
Q = $35,000 /$100
Q = 350 Units
Q* = Number (Quantity) of units sold.
**The break even point can be computed by finding that point where profit is zero
The break even point in sales dollars can be computed by multiplying the break even level of unit sales by the selling price per unit.
350 Units × $250 Per unit = $87,500
Contribution Margin Method:
The contribution margin method is actually just a short cut conversion of the equation method already described. The approach centers on the idea discussed earlier that each unit sold provides a certain amount of contribution margin that goes toward covering fixed cost. To find out how many units must be sold to break even, divide the total fixed cost by the unit contribution margin.
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