Break-Even Analysis high output, the level of fixed costs will remain broadly

the same.
What is BREAK-EVEN ANALYSIS?
A break-even analysis is a financial tool which helps a
company to determine the stage at which the company,
or a new service or a product, will be profitable. In
other words, it is a financial calculation for determining
the number of products or services a company should
sell or provide to cover its costs (particularly fixed
costs).
Break-even point (BEP)
 is the point at which total cost and total revenue
are equal.
 There is no net loss or gain
Break-even is a situation where an organisation is
neither making money nor losing money, but all the
costs have been covered.
Break-even analysis is useful in studying the relation
between the variable cost, fixed cost and revenue.
Generally, a company with low fixed costs will have a
low break-even point of sale
Examples of fixed costs:
- Rent and rates
- Research and development
- Marketing costs (non- revenue related)
- Administration costs
2. VARIABLE COST
Variable costs are those costs which vary directly with
the level of output. They represent payment output-
related inputs such as raw materials, direct labour, fuel
and revenue-related costs such as commission.
A distinction is often made between "Direct" variable
costs and "Indirect" variable costs.
a) Direct variable costs are those which can be
directly attributable to the production of a
particular product or service and allocated to a
particular cost centre. Raw materials and the
wages those working on the production line are
good examples.
b) Indirect variable costs cannot be directly
attributable to production but they do vary
with output. These include depreciation (where
it is calculated related to output - e.g. machine
hours), maintenance and certain labour costs.

3. CONTRIBUTION MARGIN

Contribution margin is a product’s price minus all

associated variable costs, resulting in the incremental
profit earned for each unit sold.

Sales - Variable Cost

The total contribution margin generated by an entity

represents the total earnings available to pay for fixed
expenses and to generate a profit.
Components of Break-Even Analysis
“Money used to pay off Fixed Cost”
a) Fixed Cost
EXAMPLES for Contribution Margin
b) Variable Cost
c) Contribution Margin Sales - Variable Cost = Contribution Margin
d) Contribution Margin Ratio

1. FIXED COST

Fixed costs are those business costs that are not

directly related to the level of production or output. In
other words, even if the business has a zero output or
4. CONTRIBUTION MARGIN RATIO
The contribution margin ratio is the difference
between a company's sales and variable expenses,
expressed as a percentage. The total margin generated
by an entity represents the total earnings available to
pay for fixed expenses and generate a profit.
CONTRIBUTION MARGIN RATIO = CONTRIBUTION
MARGIN / SALES REVENUE
EXAMPLES for Contribution Margin Ratio
Contribution Margin Ratio = Contribution Margin /
Sales Revenue
Calculation of Break-even Analysis
The break-even point formula is calculated by dividing
the total fixed costs of production by the price per unit
less the variable costs to produce the product.
Since the price per unit minus the variable costs of
product is the definition of the contribution margin per
unit, simply rephrase the equation by dividing the fixed
costs by the contribution margin.
Break Even Point in Dollars
Next, the break-even formula in sales dollars is
calculated by multiplying the price of each unit by the
answer from the first equation.
This will provide the total dollar amount in sales
needed to achieve in order to have zero loss and zero
profit.
Number of Units to Produce the Desired Profit
Now, compute the total number of units that need to be
sold in order to achieve a certain level profitability
without break-even calculator.
First, take the desired dollar amount of profit and
divide it by the contribution margin per unit. The
computes the number of units needed to sell in order
to produce the profit without taking in consideration
the fixed costs. Then add back in the break-even point
number of units.
EXAMPLE:
Barbara is the managerial accountant in charge of a
large furniture factory’s production lines and supply
chains. She isn’t sure the current year’s couch models
are going to turn a profit and what to measure the
number of units they will have to produce and sell in
order to cover their expenses and make at $500,000 in
profit. Here are the production stats. Compute for the
(a) break-even point in unit, (b) break-even point in
dollar sales, and (c) number of units to produce the
desired profit given the following data.
 Total fixed costs : $500,000
 Variable costs per unit : $300
 Sale price per unit : $500
 Desired profits : $200,000
Step 1: First, calculate the break-even point per unit, so
we will divide the $500,000 of fixed costs by the $200
contribution margin per unit ($500 – $300).
The Barbara’s factory will have to sell at least 2,500
units in order to cover its fixed and variable costs.
Anything it sells after the 2,500 mark will go straight to
the CM since the fixed costs are already covered.
  Break Even Points in Units : 2500
 Sale price per unit : $500
 Desired profits : $200,000

Step 2: Next, Barbara can translate the number of units

into total sales dollars by multiplying the 2,500 units by
the total sales price for each unit of $500.

Now Barbara can go back to the board and say that the
company must sell at least 2,500 units or the equivalent
of $1,250,000 in sales before any profits are realized

 Total fixed costs : $500,000

 Variable costs per unit : $300
 Sale price per unit : $500
 Desired profits : $200,000
 Break Even # of units : 2,500

Step 3: She can also take it a step further and use a

break-even point calculator to compute the total
number of units that must be produced in order to meet
her $200,000 profitability goal by dividing the $200,000
desired profit by the contribution margin then adding
the total number of break-even point units