The break-even point can be calculated in terms of both units and revenue.
Two equations may be used to calculate a company's break-even point. First, the company can compute its break-even point in terms of units. In other words, the company can calculate how many units it needs to sell so it can break even. In this case, the company divides its total fixed costs by the unit's contribution margin.
For example, if a company has fixed costs of $10,000 and its contribution margin is $10, then the break-even point is 1,000 units.
As such, as long as the company sells 1,000 units, its revenue minus expenses will equal zero. This break-even method may help companies determine how many units to produce and divide among different distributors.
A company can also calculate its break-even point in terms of revenue. This method tells the company how much it must earn from the sale of the units to break even. To do this, companies divide the total fixed costs by the contribution margin ratio per unit. The contribution margin ratio
provides a percentage of how much of a single dollar of revenue goes toward fixed costs. Companies calculate the contribution margin ratio by dividing the contribution margin per unit by the unit's sales price.
For example, a company has fixed costs of $5,000, has a contribution margin of $10, and plans to sell its units for $40 each. First, the company needs to compute its contribution margin ratio per unit, which is the contribution margin per unit divided by the sales price per unit. Here, the contribution margin ratio per unit is 25% ($10 contribution margin divided by $40 sales price per unit). Next, the company needs to compute its break-even revenue by dividing its total fixed costs of $5,000 by the 25% contribution margin ratio per unit. Thus, the company must have revenue of $20,000 to break even. This break-even method helps companies decide how to price their units.