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Calculating break even point

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Break-Even Point and Target Income

Detienne Company manufactures and sells one product for $20 per unit. The unit contribution margin is 40% of the sales price, and fixed costs total $80,000.

1. Using the equation approach, compute:
A) The break-even point in sales dollars and units.
B) The sales volume (in units) needed to generate a profit of $40,000.
C) The break-even point (in units) if variable costs increase to 80% of the sales price and
fixed costs increase to $100,000.

2. See if you can recompute the solutions to 1(a), 1(b), and 1(c) in one equation step using either the contribution margin ratio or the contribution margin dollars per unit.

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Solution Summary

Solution describes the steps to calculate break even point and sales volume needed to generate a given profit level.

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Please refer attached file for better clarity of formulas in Excel.

1. Using the equation approach, compute:
A) The break-even point in sales dollars and units.
Price=P=$20
Contribution Margin=CM=40%
Variable Cost per unit=V=P*(1-CM)=$12
Fixed Costs=F= $80,000
Let Q be the breakeven quantity.
Total Revenue=P*Q=20Q
Total Variable Cost, TVC=V*Q=12Q
Total Cost=F+TVC=80000+12Q
At breakeven, TR=TC
So, 20Q=80000+12Q
8Q=80000
Q=80000/8=10000 ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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