Break-even point Definition
The break-even point is a point of sales at which there is no gain no loss. In simple words it the level of sales at which sales are exactly equal to its expenses. Break-even analysis assumes that there are two types of costs; fixed and variable. Breakeven sales cover only variable costs and fixed costs. Sales less variable cost is called “contribution margin” that covers the fixed costs and of course profit. But at the break-even point the contribution covers only fixed cost. The following statement is explaining a state of break-even.
Sales – Variable cost = Fixed cost or
Contribution margin = Fixed cost
Break-even point Formula
Since break-even point is a level of sales so it can be in units as well as in dollar amount. However formulas for both are slightly different.
Break-even point Example
Mr. Bake runs a bakery by selling breads for $5 each and it costs him $2 to bake each bread. The only fixed cost of the bakery is rent of the shop that is $2,100 a month. Now the break-even point will decide that how many breads should Mr. Bake sell to cover all his costs.
Here are some basic calculations that are required by formula:
Contribution margin per unit= CM = SP – VC = $5 - $2 = $3 per bread
Contribution margin ratio = CM/ SP = $3/$5 = 60%
There is another way to find out the breakeven sales if you already know the number of units required to break-even.
Break-even point in Sales dollars = Break-even units x SP = 700 x $5 = $3,500
To understand the break-even point concept in more detail here is the proof that by selling 700 breads there will be no gain and no loss to the bakery.
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