Break even point is the level of sales at which profit is zero. According to this definition, at break even point sales are equal to fixed cost plus variable cost. This concept is further explained by the the following equation: [Break even sales = fixed cost + variable cost]
The break even point can be calculated using either the equation method or contribution margin method. These two methods are equivalent.
The equation method centers on the contribution approach to the income statement. The format of this statement can be expressed in equation form as follows: Profit = (Sales − Variable expenses) − Fixed expenses
Rearranging this equation slightly yields the following equation, which is widely used in cost volume profit (CVP) analysis: Sales = Variable expenses + Fixed expenses + Profit
According to the definition of break even point, break even point is the level of sales where profits are zero. Therefore the break even point can be computed by finding that point where sales just equal the total of the variable expenses plus fixed expenses and profit is zero.
For example we can use the following data to calculate break even point. |Sales price per unit = $250 | |variable cost per unit = $150 | |Total fixed expenses = $35,000 | |Calculate break even point |
|Sales = Variable expenses + Fixed expenses + Profit | |$250Q* = $150Q* + $35,000 + $0**...