![]() These units have to be split back out into plain and fancy. So, we need 2,267 units in order to break-even. We need to find out the break-even point. Let’s take another contribution margin example and say that a firm’s fixed expenses are 100,000. Finding the break-even point or the sales necessary to meet a desired profit is very useful to a business, but cost-volume-profit analysis also can be used to conduct a sensitivity analysis, which shows what will happen if the sales price, units sold, variable cost per unit, or fixed costs change. If the Solved The break-even point is defined as. In most real cases, none of your numbers will come out exactly even the way they do in the textbook. We will look at how contribution margin equation becomes useful in finding the break-even point. The breakeven point in CVP analysis is defined as: Fixed costs divided by the contribution margin per unit. This is a different rounding rule than normal because even if the fraction came out to be less than half a unit, we would still round up rather than round down.įor instance, if your calculation showed that you needed 999.25 units, you would still have to make 1,000 units in order to have a slight profit instead of a slight loss. In other words, no profit or loss occurs at break-even because Total Cost Total Revenue. Since we can’t make ⅔ of a unit, we round up to the next highest. The break-even point is the dollar amount (total sales dollars) or production level (total units produced) at which the company has recovered all variable and fixed costs. This is a repeating decimal that is more accurately expressed as a fraction = 2,266 ⅔ units. ![]() To get the break-even quantity then, we would divide total fixed costs that need to be covered by the weighted average contribution margin: The total contribution margin will be $3,944.00 + $406.00 = $4,350.ĭivide that by total units of 2,900 and we get a weighted average contribution margin of $1.50. Break-Even Quantity Fixed Costs / (Sales Price per Unit Variable Cost Per Unit) where: Fixed Costs are costs that do not change with varying output (e.g. Figure 3. The contribution margin for fancy journals will be $0.70 X 580 = $406.00. The break-even point is the dollar amount (total sales dollars) or production level (total units produced) at which the company has recovered all variable and fixed costs. The contribution margin for plain journals will be $1.70 X 2,320 = $3,944.00. ![]() A straight average of the two contribution margins would be (1.70 + 0.70) / 2 = 1.20, but a simple average like that doesn’t take into account the fact that we are planning to sell four times as many plain journals as we do fancy (expressed as a ratio, it would be 4:1).Ī weighted average takes the different volumes of each product into account by first extending the contribution margins to get the total contribution margin, and then dividing that amount by the total units.
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