Break-Even Analysis

Question 1

Break Even Analysis Steps

Answer 1

Step 1. Classify costs as fixed or variable.

Step 2. Determine variable costs (VC) as a percentage of sales.

Step 3. Determine contribution margin ratio (CMR).

Step 4. Calculate break-even sales.

Question 2

Break Even Analysis Formula

Answer 2

Fixed Costs / CMR = Break Even / Sales $

Fixed Costs / (Price/unit) - (Variable Cost/unit) = Break Even Units

Question 3

Break Even Analysis Sample

Answer 3

Example:
Step 1. Total Costs of $3,000,000 classified as $970,000 Fixed Cost (FC) and $2,030,000 Variable Cost (VC).

Step 2. Sales = $2,900,000. $2,030,000 (VC) divided by $2,900,000 (Sales) = .70

Step 3. Contribution Margin Rate (CMR) 100% - 70% (VC) = 30%

Step 4. $970,000 (FC) divided by 30% (CMR) = $3,233,333 (Break-Even Sales $)
12,000 (P/Unit) - $9,000 (VC/Unit) = $3,000
970,000 (FC) divided by $3,000 = 323 (Break-Even Units)

Question 4

Sales Level To Make A Profit

Answer 4

Break-Even Level.
$970,000 (Fixed Costs) divided by $3,000 ((P/Unit) – (VC/Unit)) = 323 Units.
$970,000 (Fixed Costs) divided by .30 (CMR) = $3,233,333 Sales Level.

Sales Level to Make a Profit.
$970,000 (Fixed Costs) + $50,000 (Profit) = $1,020,000 (Fixed Cost & Profit)
$1,020,000 (Fixed Cost & Profit) divided by $3,000 ((P/Unit) – (VC/Unit)) = 340 Units.
$1,020,000 (Fixed Cost & Profit) divided by .30 (CMR) = 3,400,000 Sales Level