The break-even point (BEP) is calculated as the point where total revenues equal total costs, resulting in zero profit or loss. To calculate the break- even point in units, use this formula:
BEP (units)=Total Fixed CostsPrice Per Unit−Variable Cost Per Unit\text{BEP (units)}=\frac{\text{Total Fixed Costs}}{\text{Price Per Unit}-\text{Variable Cost Per Unit}}BEP (units)=Price Per Unit−Variable Cost Per UnitTotal Fixed Costs
where:
- Fixed costs are expenses that do not change with production volume (e.g., rent, salaries).
- Price per unit is the selling price of each unit.
- Variable cost per unit is the cost that varies with each unit produced.
To calculate the break-even point in sales dollars, use:
BEP (sales dollars)=Total Fixed CostsContribution Margin Ratio\text{BEP (sales dollars)}=\frac{\text{Total Fixed Costs}}{\text{Contribution Margin Ratio}}BEP (sales dollars)=Contribution Margin RatioTotal Fixed Costs
where:
- Contribution Margin Ratio = Price Per Unit−Variable Cost Per UnitPrice Per Unit\frac{\text{Price Per Unit}-\text{Variable Cost Per Unit}}{\text{Price Per Unit}}Price Per UnitPrice Per Unit−Variable Cost Per Unit
The contribution margin represents the amount per unit that contributes to covering fixed costs after variable costs are deducted. For example, if fixed costs are $20,000, the selling price per unit is $100, and the variable cost per unit is $60, then:
- Contribution margin = $100 - $60 = $40
- Break-even point in units = $20,000 / $40 = 500 units
- Contribution margin ratio = $40 / $100 = 0.4
- Break-even point in sales dollars = $20,000 / 0.4 = $50,000
This means selling 500 units or $50,000 in sales covers all costs exactly, resulting in no profit or loss.
