Break-even Point

1. BREAKEVEN POINT

Teacher: Yerlan Iskanderov

2. LESSON OBJECTIVES

Define the break-even point;
Explain its importance in business;
Calculate the break-even point using
formula;
Analyze the impact of changes in cost and
price.

3. BRAINSTORM

How do businesses know when they
start making a profit?
What is the Break-even point?
Why is the Break-even point
important?

4. DEFINITION

The break-even point is the point at which total
cost and total revenue are equal, meaning there is
no loss or gain for your (small) business. In other
words, you’ve reached the level of production at
which the costs of production equals the revenues
for a product.

5. BREAKEVEN POINT – Interpretations

It is the point in your business transactions when
business does not have either profit is loss of
doing that business. (P=L=0);
It is the point that above it, the business starts
making profit (revenue exceeds costs), all
factors remaining constant. At the breakeven
point: TOTAL REVENUE = TOTAL COST;
This is the point in which to recover the fixed
cost of the business.

6. BREAK-EVEN POINT FORMULA

Break-even Point (units) = Fixed Costs /
(Selling Price per Unit – Variable Cost
per Unit)

7. EXAMPLE CALCULATION

• Fixed Costs = $10,000;
• Selling Price per Unit = $50;
• Variable Cost per Unit = $30.
Calculate the Break-even Point.
Answer key: Break-even Point =
10,000 / (50 – 30) = 500 units

8. ACTIVITY 1: CALCULATE THE BREAK-EVEN POINT

XYZ Corporation has calculated that it has fixed costs
that consist of its lease, depreciation of its assets,
executive salaries, and property taxes.
Those fixed costs add up to $60,000.
Their product is the widget. Their variable costs
associated with producing the widget are raw material,
factory labor, and sales commissions. Variable costs have
been calculated to be $0.80 per unit.
The widget is priced at $2.00 each.
Draw a graph.

9. ACTIVITY 1: ANSWER KEY

Given this information, we can calculate the
breakeven point for XYZ Corporation’s
product, the widget, using our formula above:
BEP = $60,000 ÷ ($2.00 - $0.80) = 50,000 units.
What this answer means is that XYZ
Corporation has to produce and sell 50,000
widgets in order to cover their total expenses,
fixed and variable. At this level of sales, they
will make no profit but will just break even.

10. GRAPH

11. CONTRIBUTION MARGIN

12. What is Contribution Margin?

Contribution Margin (CM) is the
amount remaining after subtracting
variable costs from revenue.
It shows how much revenue
contributes to covering fixed costs
and generating profit.
Higher CM = Higher Profit Potential.

13. CONTRIBUTION MARGIN FORMULA

Contribution Margin (CM) = Selling Price per
Unit – Variable Cost per Unit
Contribution Margin Ratio = (Contribution
Margin ÷ Selling Price) × 100

14. Example: Selling a Laptop

Selling Price per Laptop = $1,000
Variable Cost per Laptop = $600
Calculate Contribution Margin and Contribution
Margin ratio.
Answer keys:
Contribution Margin = $1,000 – $600 = $400
Contribution Margin Ratio = (400 ÷ 1,000) × 100
= 40%
Each laptop sale contributes $400 to cover fixed
costs and generate profit.

15. Calculating The Break-Even Point in Value (dollar, tenge, ruble etc.)

BEP in currency = Fixed Costs ÷
Contribution Margin ratio (Sales price per
unit – Variable costs per unit, with resulting
figure then divided by sales price per unit)

16. ACTIVITY 2

Sam’s Sodas is a soft drink manufacturer in the Seattle
area. He is considering introducing a new soft drink,
called Sam’s Silly Soda. He wants to know what kind of
impact this new drink will have on the company’s
finances. So, he decides to calculate the break-even point,
so that he and his management team can determine
whether this new product will be worth the investment.
His accounting costs are as follows, for the first month the
product will be in production:
Fixed Costs = $2,000 (total, for the month);
Variable Costs = $0.40 (per can produced);
Sales Price = $1.50 (a can)
Calculate the Break-Even Point in units and in dollars.

17. Calculating The Break-Even Point in Units

BEP in units = Fixed Costs ÷ (Sales price per unit – Variable costs per
unit)
BEP = $2000/($1.50 – $0.40)
Or $2000/1.10
= 1818 units
This means Sam needs to sell just over 1800 cans of the new soda in a
month, to reach the break-even point.
Calculating The Break-Even Point in Sales Dollars
BEP in dollars = Fixed Costs ÷ Contribution Margin ratio (Sales price per
unit – Variable costs per unit, with resulting figure then divided by sales
price per unit)
$2000/0.7333=$2727
This means Sam’s team needs to sell $2727 worth of Sam’s Silly Soda in
that month, to break even. Anything after that amount, will be profit for the
company.
To confirm this figure: you can take the 1818 units from the first
calculation, and multiply that by the $1.50 sales price, to get the $2727
amount.

18. TASK 1

A manufacturing company produces and sells a product with the
following financial data for the last quarter:
Total Sales Revenue: $500,000;
Total Variable Cost: $200,000;
Fixed Costs: $150,000;
Total Units Produced and Sold: 10,000
Using the given data, complete the following tasks:
Questions:
Calculate the Selling Price per Unit.
Calculate the Variable Cost per Unit.
Calculate the Contribution Margin per Unit.
Determine the Break-even Point in Units and draw a graph.

19. Answer key

20. Answer key

21. Task 1: Graph

22. REFLECTION

1. What have you learned
today?
2. What was difficult?
3. What was easy?