Two Methods of Breakeven Analysis
Kyle Ashcraft, CPA · 2019 CPA Exam Scores · 95 FAR · 98 BEC · 91 REG · 90 AUD
You can express a breakeven point two ways: as a number of units, or as a dollar amount of sales. Both describe the exact same point — where a company stops losing money — just from different angles.
How do you calculate breakeven in units?
Divide fixed costs by the contribution margin per unit.
Say fixed costs are $10,000 and the contribution margin per unit is $4:
How do you calculate breakeven in sales dollars?
If you already know the breakeven unit count, just multiply by the price per unit. Each unit sells for $6, so:
What is the contribution margin ratio?
The contribution margin ratio is the contribution margin expressed as a share of the sales price, instead of a dollar amount per unit. Divide the contribution margin per unit by the sales price per unit:
That means 67 cents of every sales dollar is contribution margin, and the remaining 33 cents covers variable costs.
How do you find breakeven sales when you only have the ratio?
This is the real payoff of the ratio: you can jump straight to a breakeven sales dollar figure without ever knowing the sales price or variable cost per unit.
Say fixed costs are $35,000 and the contribution margin ratio is 0.4:
Both methods describe the same breakeven point. Use units when you know the contribution margin per unit and price; use the contribution margin ratio when you only have percentages, or want to skip straight to a dollar figure.
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Kyle Ashcraft, CPA scored 90 or above on every section of the CPA exam in 2019, including a 98 on BEC. He is the founder and sole instructor of Maxwell CPA Review, a complete CPA review course covering all six sections, where he creates every lecture, textbook and study outline himself.