Break-even is the point of zero loss or profit. At break-even point, the revenues of the business are equal its total costs and its contribution margin equals its total fixed costs. Break-even point formula is defined as a level of sales at which profit is zero.In other words we can also say that at break point of a sales there is no net profit or loss. This definition explains that at break-even point sales is equal to fixed cost plus variable cost. Break-even point can be further explained by the following equation:

Break even sales = fixed cost + variable cost

Break-even point is the point at which the total cost or expenditure becomes equal to revenue and hence there is no loss or profit. Break-even point is the most easy and simplest used tool in management. Break-even point helps to give a vigorous view of the relationship between sales, costs or expenditures and profit.

There are two major ways of calculating break-even point formula. These are

**• Equation method**

** • Contribution margin method**

The equation method depends mainly on the income statement. The income statement format can be expressed by the following equation:

**Profit = (Sales − Variable expenses) − Fixed expenses**

By rearranging this equation we can approach to an equation which is mostly use in cost volume profit analysis, which is as follow

**Sales = Variable expenses + Fixed expenses + Profit**

Break-even point is the point at which the total profit is zero so we can calculate the break-even point by finding the point where the sales is equal to the sum of fixed expenses, variable expenses and profit. For further explanation let us consider an example.

**Example:**

For example we can use the following figures to calculate break-even point.

**• Sales price per unit = $350**

** • variable cost per unit = $250**

** • Total fixed expenses = $35,000**

Now we will calculate the break-even point

Calculation:

**Sales = Variable expenses + Fixed expenses + Profit**

** $350Q* = $250Q* + $35,000 + $0****

** $100Q = $35000**

** Q = $35,000 /$100**

** Q = 350 Units**

** Where the Q is the number of units per sold. The break-even point sales in dollar can be computes by multiplying the break-even level of unit sales by the selling price per unit.**

** 350 Units × $250 per unit = $87,500**

The contribution margin method is the shortcut way of the equation method, it depends mainly on the idea that each unit sold gives a definite quantity of contribution margin that goes toward casing fixed cost. In order to calculate that how many units are sold to break down we have to divide total fixed cost by the unit contribution margin. This can be given by the formula:

**Break-even point in units = Fixed expenses / Unit contribution margin**

** $35,000 / $100* per unit**

** 350 Units**

In this method there is a variation that we use contribution margin ratio instead of unit contribution margin, this gives the break-even point sales in dollar rather than unit

**Break-even point in total sales dollars = Fixed expenses / CM ratio**

** $35,000 / 0.40**

** = $87,500**

Another formula can also be used to find the break-even point which also gives the same result. The formula is given below:

Break Even Sales in Dollars = [Fixed Cost / 1 – (Variable Cost / Sales)]

This formula can produce the same answer:

**Break Even Point = [$35,000 / 1 – (250 / 350)]**

** = $35,000 / 1 – 0.6**

** = $35,000 / 0.4**

** = $87,500**

The main advantage of break-even point formula is that it gives a clear picture of relationship between costs ,production ,volumes and returns, it also tell us that how changes in costs. Fixed costs, variable costs and revenue affect the profit level and break-even point level.Break even analysis is most beneficial when it is used with partial budgeting, capital budgeting techniques. The most important advantage of using break-even point analysis is that it tells us the lowest amount of business activity that can save a firm or company from losses. However it also has some limitations. It is difficult to maintain the costs as all variable or all fixed and also there may be a trend to endure to practice a break even analysis after the cost and income functions have changed.

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