In short
The break-even point is the level of sales at which total revenue equals total costs, so operating income is zero. It equals fixed costs divided by the contribution margin per unit (in units) or by the contribution margin ratio (in dollars).
Key takeaways
- Contribution margin = selling price − variable cost.
- The margin of safety is how far sales can fall before reaching break-even.
- To find the sales needed for a target profit, add the target to fixed costs.
Example
Price $50, variable cost $30 and fixed costs $200,000: break-even is 10,000 units, or $500,000 of sales.
Where it's tested
BAR: Financial Forecasting, Budgeting & Valuation — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
A product sells for $50 with variable costs of $30 per unit, and fixed costs are $200,000. What are break-even sales in dollars?