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What is the break-even formula?

Author:
Harold Averkamp, CPA, MBA

Break-even Point in Units of Product

The formula for determining the break-even point in units of product sold is: total fixed expenses divided by the contribution margin per unit. For example, if a company’s total fixed expenses for a year are $300,000 and it has a contribution margin of $4 per unit (selling price of $10 per unit minus variable expenses of $6 per unit), the company’s break-even point in sales for the year is 75,000 units.

Break-even Point in Billable Service Hours

For a service business, the units could be the company’s hours billed to clients. For example, if the business has total fixed expenses of $300,000 for a year and it has a contribution margin of $40 per billable hour (hourly billing rate of $100 minus variable expenses of $60 per hour), the break-even point for the year is 7,500 hours billed at $100 per hour.

Break-even Point in Dollars of Revenue

The formula for determining the break-even point in dollars of product or services is the total fixed expenses divided by the contribution margin ratio (or %). For instance, if a company has total fixed expenses for a year of $300,000 and a contribution margin ratio of 40%, the break-even point for the year in revenue dollars is $750,000.

Limitation of Break-even Formula

The break-even formula is overly simplistic for computing a company’s break-even point if the company has a wide variety of products (and/or services) with varying contribution margins and contribution margin ratios.

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About the Author

Harold Averkamp

For the past 52 years, Harold Averkamp (CPA, MBA) has
worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on AccountingCoach.com.

Learn More About Harold

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