Question

define (breakeven point) and have examples

Answer 1

Break even Point

Defination :

Break even point is the production level where total revenues equals total expenses. In other words, break even point is where a company produces the same amount of revenues as expenses either during a manufacturing process or an accounting period.

Since revenues equals expenses, the net profit for the period will be Zero. Therefore at breakeven point the company is in No Profit No Loss position.

The break even point formula is calculated by dividing the total fixed cost of production by the price per unit less the variable cost to produce the product.

Break even point in units = Fixed Cost / ( Sales Price per unit - Variable Cost per unit)

Since the price per unit less the variable cost of the product is definition of the contribution margin per unit , we can simply simply rephrase the equation by dividing the fixed cost by the contribution margin.

Break even point in units = Fixed Cost / Contribution Margin per unit

And further multiplying the break even point in units with the sales price per unit we get the break even point in Dollars.

Break even point in Dollars = Break even point in units X Sales Price per unit

Taking this concept a step further and compute the total numbers of units that needs to be sold in order to achieve a certain level of profitability with out break even calculator. For this we take the desired dollar amount of profit and divide it by Contribution Margin per unit and adding back the break even units.

Break Even Analysis

Units to produce the desired profit = ( Desired profit in dollars / Contribution Margin per unit) + Break even point in units

For example:

Total Fixed Cost	$ 500,000
Variable Cost per unit	$ 300
Sales Price per unit	$ 500
Desired Profit	$ 200,000

• Break even point in units = Fixed Cost / ( Sales Price per unit - Variable Cost per unit)

                                              = $ 500,000 / ( $ 500 - $ 300)

                                              = 2,500 units

• Break even point in Dollars = Break even point in units X Sales Price per unit

                                               = 2,500 units X $ 500 per unit

                                               = $ 1,250,000

• Break Even Analysis

Units to produce the desired profit = ( Desired profit in dollars / Contribution Margin pernunit) + Break even point in units                                                                      

                                                                  = [$ 200,000 / ( $ 500 - $ 300)] + 2,500 units

                                                                  = 3,500 Units