Break-even Point Equation Method

Break-even is the point of zero loss or profit. At break-even point, the revenues of the business are equal its total costs and its contribution margin equals its total fixed costs. Break-even point can be calculated by equation method, contribution method or graphical method. The equation method is based on the cost-volume-profit (CVP) formula:

px = vx + FC + Profit

Where,
p is the price per unit,
x is the number of units,
v is variable cost per unit and
FC is total fixed cost.

Calculation

BEP in Sales Units

At break-even point the profit is zero therefore the CVP formula is simplified to:

px = vx + FC

Solving the above equation for x which equals break-even point in sales units, we get:

Break-even Sales Units = x =FC
p − v

BEP in Sales Dollars

Break-even point in number of sales dollars is calculated using the following formula:

Break-even Sales Dollars = Price per Unit × Break-even Sales Units

Example

Calculate break-even point in sales units and sales dollars from following information:

Price per Unit$15
Variable Cost per Unit$7
Total Fixed Cost$9,000

Solution

We have,
p = $15
v = $7, and
FC = $9,000

Substituting the known values into the formula for breakeven point in sales units, we get:

Breakeven Point in Sales Units (x)
= 9,000 ÷ (15 − 7)
= 9,000 ÷ 8
= 1,125 units

Break-even Point in Sales Dollars = $15 × 1,125 = $16,875

Written by Irfanullah Jan