How it’s calculated
Each unit sold contributes its price minus its variable cost towards fixed costs. You break even when total contribution equals fixed costs, so profit is zero.
Example (OpenStax Managerial Accounting, Hicks Manufacturing): price 100, variable cost 20, fixed costs 18,000 per month. CM = 80 per unit, CM ratio = 80%. Break-even = 18,000 ÷ 80 = 225 units, or 18,000 ÷ 0.80 = 22,500 of sales.
This is a planning estimate. It assumes a constant price and variable cost per unit and that every unit made is sold.
Frequently asked questions
What is the break-even point?
The sales volume at which total revenue equals total costs, so the business makes neither a profit nor a loss.
What is the contribution margin ratio?
The share of each sales dollar left over after variable costs to cover fixed costs and profit. An 80% CM ratio means 0.80 of every 1.00 of sales goes towards fixed costs.
How do I include a profit target?
Add the target profit to fixed costs before dividing. To earn 4,000 in the example: (18,000 + 4,000) ÷ 80 = 275 units.
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Sources
- Principles of Accounting, Volume 2, 3.2: Calculate a Break-Even Point in Units and Dollars — OpenStax
- Principles of Accounting, Volume 2, 3.1: Explain Contribution Margin and Calculate Contribution Margin per Unit, Contribution Margin Ratio, and Total Contribution Margin — OpenStax
- Calculate your startup costs (Break-even point) — U.S. Small Business Administration
Formulas are taken from the free public references above. Results are provided “as is” for informational and educational purposes only. See our disclaimer.
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