Breakeven point is a fundamental concept in managerial accounting that refers to the point at which total sales revenue equals total expenses, resulting in a net income of zero. At this point, a company is neither making a profit nor incurring a loss.
In other words, the breakeven point is the level of sales that a company needs to achieve to cover all of its expenses, including variable and fixed costs. Once this point is reached, any additional sales will result in a profit for the company.
Calculating the Breakeven Point
The breakeven point can be calculated using this formula:
Breakeven Point = Total Fixed Costs / (Price per Unit – Variable Cost per Unit)
In this formula, the total fixed costs are the expenses that remain constant regardless of the level of sales, such as rent, salaries, and insurance. The price per unit refers to the selling price of each unit of product or service, while the variable cost per unit includes all the costs that vary with the level of sales, such as materials, labor, and shipping. The calculation (Price per Unit – Variable Cost per Unit) is also known as the Contribution Margin.
Once the breakeven point has been calculated, a company can use it as a benchmark to determine how many units it needs to sell to achieve a desired level of profit. For example, if a company wants to make a profit of $10,000 and the unit contribution margin is $5, it would need to sell an additional 2,000 units to achieve this goal. A desired level of profit is also known as Target Profit.
Breakeven analysis is a tool that managers can use to analyze the relationship between sales, costs, and profits. By calculating the breakeven point, managers can determine the level of sales needed to cover all expenses and make a profit.
Breakeven analysis can be used to make important business decisions, such as pricing strategies, product mix, and cost control measures. For example, a company may decide to increase the price per unit of a product to cover higher costs, or to reduce variable costs by outsourcing production to a cheaper supplier.
The breakeven point is a critical concept in managerial accounting that helps companies determine the level of sales needed to cover all expenses and make a profit. By calculating the breakeven point and using breakeven analysis, managers can make informed decisions about pricing, production, and cost control measures to achieve their business goals.