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What is the break-even point?

Author:
Harold Averkamp, CPA, MBA

Definition of Break-even Point

In accounting, the break-even point refers to the revenues necessary to cover a company’s total amount of fixed and variable expenses during a specified period of time. The revenues could be stated in dollars (or other currencies), in units, hours of services provided, etc.

The basic calculation of the break-even point in sales dollars for a year is: fixed expenses (fixed manufacturing, fixed SG&A, fixed interest) for the year divided by the contribution margin ratio or percentage.

The basic calculation of the break-even point in units sold for a year is: fixed expenses for the year divided by the contribution margin per unit of product.

Examples of Break-even Point

To illustrate the break-even point, let’s assume that a company’s fixed expenses are $480,000 for a year, its variable expenses (variable manufacturing, variable SG&A, variable interest) average $8 per unit of product, and its selling prices average $20 per unit. The result is an average contribution margin of $12 per unit and an average contribution margin ratio of 60% ($12 divided by the average selling price of $20). Using this information, the company will have:

  • A break-even point in sales dollars of $800,000 [$480,000 divided by 60%]
  • A break-even point in units of product of 40,000 [$480,000 divided by $12 per unit]

The break-even calculations are based on the assumption that the change in a company’s variable costs are related to the change in revenues. This assumption may not hold true for a variety of reasons including changes in the mix of products sold and varying contribution margins of the products.

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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.

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