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
by Irfanullah Jan, ACCA and last modified on