Question

What is the calculation to determine the break even point when using the contribution margin approach ? Please explain

Answer 1

Break even point is a situation where organization at no profit no loss position it can be calculated using contribution margin.

Contribution margin = Selling price - Variable cost

Contribution Margin ratio = (Selling price - Variable cost) / Selling price

Break even point (in units) = Fixed cost / Contribution margin

Break even point (in dollars) = Fixed cost / Contribution margin ratio

Example:-

Selling price per unit = $100

Variable cost per unit = $40

Expected Fixed cost = $12,000

Contribution margin = $100 - $40 = $60

Contribution margin ratio = $60 / $100 = 60%

Break even point (in units) = $12,000 / $60 = 200 units

Break even point (in dollars) = $12,000 / 0.60 = $20,000

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