Breakeven point: Calculating method

This method involves calculating break even output without the use of graphs.

Calculate the Contribution per unit.

Contribution is the excess of price over variable costs. Any money received over the variable costs makes a contribution towards the fixed costs.

Contribution per unit = Selling price per unit – Variable cost per unit

Divide Fixed Cost by Contribution per unit

  • (Fixed cost/contribution per unit). This will give you the break even output.

To calculate break even in revenue, multiply break even output with price per unit

(Break even (in units) X price per unit)

Example

  • Fixed cost=$100,000
  • Variable Cost = $1 per unit
  • Selling Price= $5 per unit
  • Maximum capacity output= 200,000 units per year

Calculate

  • Break even output
  • Margin of safety
  • Profits at maximum output

Answer:

  • Calculate the Contribution per unit = $5-$1=$4

Break even output = FC/contribution per unit= $100000/$4=25,000 units
Therefore this business has to produce 25,000 units to breakeven. In other words, at 25,000 units of output the business will have neither profit nor loss.

Break even in terms of revenue will be=

25,000 X selling price=

25,000 X $5= $125,000

  • Margin of Safety= Maximum capacity- Break even output

200,000 units – 25,000 units = 175,000 units

  • Profit at maximum output = Contribution per unit X margin of safety

$4 X 175,000 units= $700,000

To achieve a target rate of profit
We can also calculate the level of output needed to achieve the profit target by using the following formula:

(Fixed cost + target profit)/ Contribution per unit

 

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