Break-even in Accounting - Cost Volume Profit Analysis

Break-even in Accounting - Cost Volume Profit Analysis

The break-even point is when a company has Net Income of zero ($0.00). The revenues generated covered the expenses. There are two types on expenses: fixed and variable expenses.

To find the break-even point, you need to know the Contribution Margin. The contribution margin can be shown as either a percentage or per unit number.

The calculation of the break-even point is fixed expenses divied by the contribution margin ratio or percentage or the contribution margin per unit of product.

Variable Expenses

Variable expenses vary based on the amount of output. If you produce more product, variable cost go out. If you product less, variable expenses go down.

Examples of varible cost:

  1. Direct material
  2. Direct labor
  3. Sales commissions
  4. Credit card fees
  5. Freight out

Fixed Expenses

Fixed cost stay the same regardless of the amount of output. Producing more or less has no effect on fixed cost.

Examples of fixed cost:

  1. Supervisors' salaries
  2. Rent
  3. Insurance
  4. Utlities
  5. Depreciation

Calculate the break-even based on contribution margin per unit.

Divide fixed cost by contribution margin per unit to get the number of units to break-even. In the example below, our contribution margin is $8 per unit (20-12), and we have fixed expenses of $8,000. Divide 8,000 by 8 and that equals 1,000 units. Below 1,000 would be a net loss. Over 1,000 would be net profit.

 

YouTube video on Break-even in Excel with a chart

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Chris Menard

Chris is a Microsoft Office Master Instructor. He trains corporate clients in Microsoft Excel, PowerPoint, Word, and Outlook. Menard is a speaker for the Georgia Society of CPAs and the University of Georgia Terry College of Business. Menard's YouTube channel has over 400 technology videos.

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