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Break-Even Points
A company breaks-even when Total Cost equals Total Revenue, in other words there is no loss and no profit; in terms of the Contribution Margin, we say that a company breaks even when the total contribution margin equals the total fixed costs.
The break-even point can be expressed both in terms of units sold and dollars of revenue (sales):
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Example: Break-Even Point
Karla Garabedian is considering opening a window cleaning business. She estimates that the following costs will be incurred during the first year of operations: Rent, $3,000; depreciation on equipment, $8,500; Wages, $4,250 (wages vary with the number of windows cleaned, estimate is based on 1,000 windows cleaned in the previous year); cleaning supplies, $5 per window cleaned. Karla anticipates that she will charge customers $40 per window cleaned.
Determine the break-even point in units and in sales dollars.
Practice: Break-Even Point
ABC Inc produces skateboards and sells them for $60 each. Each skateboard costs $5 in direct materials, $7 in direct labor, and $3 in variable manufacturing overhead. The fixed manufacturing overhead costs a total of $20,000 per month and the company pays a 5% sales commission on each unit sold. There are no other costs. It is estimated that the company will sell 5,000 units this month. Compute the following:
Break-even point in units (round your answer to 0 decimal places)