Break-even point

Definition

The break-even point is the level of sales at which total revenues equal total costs, resulting in zero profit. It can be calculated in both units and dollars to determine the required sales volume or revenue needed to cover all fixed and variable costs.

5 Must Know Facts For Your Next Test

1. The break-even point formula in units is Fixed Costs / (Selling Price per Unit - Variable Cost per Unit).
2. The break-even point formula in dollars is Fixed Costs / Contribution Margin Ratio.
3. At the break-even point, Total Revenue = Total Costs (Fixed + Variable).
4. Understanding how changes in cost structures impact the break-even point is crucial for decision-making.
5. The concept helps managers set targets for profitability and pricing strategies.

Review Questions

• What is the formula to calculate the break-even point in units?
• How does an increase in fixed costs affect the break-even point?
• Why is understanding the break-even point important for managerial decision-making?

Related terms

Contribution Margin: The amount remaining from sales revenue after deducting variable expenses.

Fixed Costs: Costs that do not change with the level of production or sales volume.

Variable Costs: Costs that vary directly with the level of production or sales volume.