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March 30, 2007

How do you calculate the break-even point in terms of sales?

The break-even point in sales dollars can be calculated by dividing a company’s fixed expenses by the company’s contribution margin ratio.

The contribution margin is sales minus variable expenses. When the contribution margin is expressed as a percentage of sales it is referred to as the contribution margin ratio. (When we use the term “fixed expenses” we mean the company’s total amount of fixed costs plus its fixed expenses. When we say “variable expenses” we mean the total of the company’s variable costs plus its variable expenses.)

Let’s illustrate the break-even point in sales dollars with the following information. A company has fixed expenses of $100,000 per year. Its variable expenses are approximately 80% of sales. This means that the contribution margin ratio is 20%. (Sales minus the variable expenses of 80% of sales leaves a remainder of 20% of sales. In other words, after deducting the variable expenses there remains only 20% of every sales dollar to go towards the fixed expenses and profits. ) The fixed expenses of $100,000 divided by the contribution margin ratio of 20% equals $500,000. This tells you that if the company has sales of approximately $500,000 it will be at the break-even point—the point where sales will be equal to all of the company’s expenses.

It is wise to test your calculated break-even point. In our example the sales needed to be $500,000. If the variable expenses are 80% of sales, the variable expenses will be $400,000 (80% of $500,000). This leaves $100,000 as the contribution margin in dollars. After subtracting the fixed expenses of $100,000, the net income will be zero.

Learn more about Break-even Point.

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Comments

12 Responses to “How do you calculate the break-even point in terms of sales?”

  1. charles addo-cobbiah on April 15th, 2008 6:06 am

    the page gave me exactly what I needed. Good stuff

  2. Emilia on May 8th, 2008 6:53 am

    I work at an oil company in Angola and I was chosen develop two projects:

    - One is to choose a line of lubricantes for aviation to sell in the market

    - The other is to introduce a line of mix produts (13 ) for car care and some aditives

    I have to develop a business plan for both projects and calculate its breakeven point.

    I would like to know what are the elements that I have consider in order to develop a good business plan for both projects.

    I am looking forward for your reply

    Best Regards

    Emilia Martins

    Thanks

  3. Rajesh Gupta on May 26th, 2008 9:22 am

    pls tell me how to pass the entry for Fringe
    tax

  4. ERICK on May 28th, 2008 4:11 am

    Help me work out this. break even analysis

    cost of good sold - 300000
    commission on sales - 12000
    salaries - 78000
    payroll expenses - 18000
    supplie - 1400
    advertising - 14000
    rent — 2400
    utilities 3000
    insurance - 1200
    interest - 1200
    depreciation - 1200
    telephone - 2400

    total sales 500000

    calculate the break even point

  5. yun on October 8th, 2008 2:44 am

    how do we calculate the break even points??

  6. mayen on October 23rd, 2008 10:54 am

    wow! i ‘m glad & loved to visit this site, i learned a lot about accounting, though it’s not my field. It’s help individual!…… thanks & more power!

  7. Valeria Mandujano on October 28th, 2008 4:09 pm

    At what level the break even point should be calculated at gross marging or operating margin (plus SG&A)?

  8. DAVIDSON MAKGAMATHA on November 18th, 2008 12:23 am

    How do we avoid break evenpoint

  9. Elisa on December 2nd, 2008 10:47 pm

    I need to calculate Break Even Point in Sales and break even point in value from the info below.

    Sales (500 surf boards0 at $250,000 at $500 per unit
    Less: variable expenses $150,000 at 300 per unit
    Contribution margin $100,000 at @200 per unit
    Less: fixed expenses $80,000 and a net income of $20,000

  10. anna on May 27th, 2009 8:03 am

    selling price $10
    Cost price $ 8
    commission 5% of sales
    Fixed expenses $60,000

    calculate break even point in sales.

    Please help me with this question, thank you

  11. ekene on May 28th, 2009 5:46 am

    Is advertisement under fixed cost or under variable cost?

  12. Ken on June 2nd, 2009 7:36 am

    For Anna’s break-even problem:

    Contribution margin is $1.50 ($10 - $8 - $0.50) = $1.50

    Breakeven = Fixed expense/Contribution Margin = $60,000/$1.50 = 40,000 units ($400,000 in sales).

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