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.