Break-Even Point Analysis

Read this text on break-even point analysis. It goes through the process of calculating the break-even point for cost analysis under different scenarios. Take notes on each of the following: define the break-even point, differentiate between fixed and variable costs, and write the formulas on how to calculate the break-even point, calculate the contribution margin, calculate the contribution margin ratio, and calculate the margin of safety.

Breakeven in Units

To illustrate the calculation of a break-even point in units, Video Productions produces videotapes selling for USD 20 per unit. Fixed costs per period total USD 40,000, while the variable cost is USD 12 per unit.

We compute the break-even point in units by dividing total fixed costs by the contribution margin per unit. The contribution margin per unit is USD 8 (USD 20 selling price per unit – USD 12 variable cost per unit). In the following break-even equation, BE refers to the break-even point:

$\text{BE units} =\frac{\text { Fixed costs }}{\text { Contribution margin per unit }}$

$\text{BE units} = \frac{\text { USD } 40,000}{\text { USD } 8 \text { per unit }}$

$\text{BE units} =5,000 \, \text{units}$

The result tells us that Video Productions breaks even at a volume of 5,000 units per month. We can prove that to be true by computing the revenue and total costs at a volume of 5,000 units. Revenue = 5,000 units X USD 20 sales price per unit = USD 100,000. Total costs = USD 100,000 = USD 40,000 fixed costs + USD 60,000 variable costs (USD 60,000 = USD 12 per unit X 5,000 units).

Note that the revenue and total cost lines cross at 5,000 units - the break-even point. Video Productions has net income at volumes greater than 5,000, but it has losses at volumes less than 5,000 units.