Break-even Point in Units of Product
The formula for determining the break-even point in units of product sold is: total fixed expenses divided by the contribution margin per unit. For example, if a company’s total fixed expenses for a year are $300,000 and it has a contribution margin of $4 per unit (selling price of $10 per unit minus variable expenses of $6 per unit), the company’s break-even point in sales for the year is 75,000 units.
Break-even Point in Billable Service Hours
For a service business, the units could be the company’s hours billed to clients. For example, if the business has total fixed expenses of $300,000 for a year and it has a contribution margin of $40 per billable hour (hourly billing rate of $100 minus variable expenses of $60 per hour), the break-even point for the year is 7,500 hours billed at $100 per hour.
Break-even Point in Dollars of Revenue
The formula for determining the break-even point in dollars of product or services is the total fixed expenses divided by the contribution margin ratio (or %). For instance, if a company has total fixed expenses for a year of $300,000 and a contribution margin ratio of 40%, the break-even point for the year in revenue dollars is $750,000.
Limitation of Break-even Formula
The break-even formula is overly simplistic for computing a company’s break-even point if the company has a wide variety of products (and/or services) with varying contribution margins and contribution margin ratios.
