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

XPLAIND.com is a free educational website; of students, by students, and for students. You are welcome to learn a range of topics from accounting, economics, finance and more. We hope you like the work that has been done, and if you have any suggestions, your feedback is highly valuable. Let's connect!

Copyright © 2010-2019 XPLAIND.com