The breakeven point occurs when the company earns a profit (net income) of $0. You would calculate the number of units the company must sell along with the corresponding sales in dollars needed to break even.
So, how do we know what the breakeven point is? Using the CVP relationship, you can see that, if the contribution margin equals the company's fixed costs, there is no profit or loss. This is the breakeven point!
Figure 12.2 below shows the relationship between sales and costs. When sales are greater than expenses (the blue area), you will have a net profit. When sales are less than expenses (red area), you will have a net loss. The point where the two lines interest is the breakeven point. You have no profit or loss (net income equals $0).
Go back to the CVP example, where the following information was available:
| Sales price per unit | $100 |
| Minus: variable cost per unit | $60 |
| Equals: contribution margin per unit | $40 |
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| Fixed costs | $1,500,000 |
The company wants to know how many units must be sold to break even (BE). You would calculate the breakeven point in units as follows:
A key number in CVP calculations is the contribution margin or contribution margin ratio. If the contribution margin and/or ratio is available, the sales and variable costs per unit and the total amounts are unnecessary for your calculations (unless one or both of the per-unit amounts change).
The target (or desired) profit for breakeven calculations is always $0.
Check the numbers:
| Sales (37,500 units x $100 per unit) | $3,750,000 |
| Variable costs (37,500 x $60 per unit) | $2,250,000 |
| Contribution margin per unit (37,500 units x $40 per unit) | $1,500,000 |
| Less: fixed costs | $1,500,000 |
| Net income | $0 |
Breakeven in sales dollars equals $3,750,000 (37,500 units at breakeven x $100 per unit selling price).
An alternative method for calculating the breakeven point in units uses the contribution margin ratio, as follows:
| Sales price per unit | $100 |
| Minus: variable cost per unit | $60 |
| Equals: contribution margin per unit | $40 |
| Contribution margin ratio = $40/$100 | 40% |
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|
-
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| Fixed costs | $1,500,000 |
Breakeven in sales dollars can be calculated as follows:
The breakeven point changes if one (or more) of the following things happens:
fixed costs change: These are changes in
the selling price changes.