 Calculating the Break-Even Pointand the Communication Margin

Break Even quantity is the formula that is used to determine the break-even point.

This formula is as follows: BEQ= FC/P-VC

Where:

FC= Fixed Costs

P= Price Charged per unit

VC= Variable Costs of production

Fixed Costs are those normal costs that are necessary to run any business. For example rent, utilities, insurance, and even salaries.

Price is the amount usually in dollars that the company will charge for the product. In manufacturing this will be the amount that is actually received for the product.

Variable Costs are all the costs associated with making the product. This may include such things as raw materials, production labor, and costs associated with running the machinery. These are all costs associated with the actual product and wouldnt be used or needed without a product.

For this example of break even analysis the book used is Carl and his toy trucks. This is a very good and valid example and we will use it with the graciousness of the authors.

The Fixed costs for Carl and his toy trucks are as follows:
FC= (Rent x 12) + (Salaries x 12) + Employee Benefits + (Insurance x 4) + Property Taxes

=(\$2,000 x 12) + (\$5,000 x 12) + \$7,000 + (\$1,500 x 4) + \$3,000

=\$24,000 + \$60,000 + \$7,000 + \$6,000 + \$3,000

=\$100,000/year

Carl sells each truck for \$10

P=\$10/truck
Variable Costs are as follows VC= Wood + Paint and finishing + Labor + Packaging and shipping

=\$1.25 + \$0.25 + \$2.50 + \$2.00

=\$6.00/ truck

Putting these variables into the formula we get: That means that in order for Carl to break even he must produce 25,000 trucks per year.

The contribution margin is the amount of profit or loss that is above or below the break-even point on a per unit basis. This formula is usually used to show the amount of profit the company has after the break-even point has been passed. In the BEQ Equation, P-VC is the contribution margin.

Revenue is just the sale price of the product times the quantity sold. Or (R= P x Q) or Carls Revenue at break even would be \$250,000 which more easily stated is \$10/per truck sale price times 25,000 trucks sold.

The same BEQ formula tweaked a little can also show us how many units need to be sold to make a certain profit. This tweaked version is as follows: In other words: The next part is break-even dollars. These are used to show how much revenue is required for break even. It is generally the same as BEQ except it expresses the contribution margin as a percentage rather then a dollar amount.   