The Break-Even Point in Dollars Methodology

When the required detailed information on unit costs or prices is unavailable, or if multiple

products are involved, you can compute the break-even point in terms of sales dollars rather than

units of output. In general, an analyst can normally compute a break-even point in sales dollars

by using data typically published in the firm’s annual report.

Because variable cost per unit and the selling price per unit are assumed to be constant, the ratio

of total variable costs to sales (VC/S) is a constant for any level of sales. Therefore, if the break-

even level of sales is denoted S*, the corresponding equation is:

S* = F/(1 – (VC/S))

where:

S* = break-even level of sales in dollars

F = fixed cost in dollars

VC = variable cost in dollars

S = sales in dollars

The algebraic development of this formula is detailed in your textbook.

For an illustration of how this process works, let’s examine a typical break-even problem.

The projected cost structure for Nanotech Industries for upcoming fiscal year 2004 is

summarized below. During this year, Nanotech projects to sell between 40,000 and 120,000 units

of Nano Widgets, which is its only product line. The projected selling price for a Nano Widget is

$20.00/unit.

Nano Widgets Cost Structure for FY 2004

Variable-Cost Components Fixed-Cost Components

Labor $5.00/unit Depreciation $350,000

Material $3.00/unit Insurance $50,000

Utilities $1.00/unit Lease cost $100,000

Packaging $1.00/unit

1. What is Nanotech’s projected break-even point for Nano Widgets in units for FY 2004?

2. What is its projected profit from Nano Widgets at 100,000 units?

1. The first step in this process is to calculate the variable cost per unit for one Nano

Widget:

Variable-Cost Components Labor $ 5.00/unit Material $ 3.00/unit Utilities $ 1.00/unit Packaging $ 1.00/unit

Variable cost $10.00/unit

2. The next step is to calculate the total fixed cost for the period, FY 2004:

Fixed-Cost Components Depreciation $350,000

Insurance $ 50,000 Lease cost $100,000

Total fixed costs $500,000

3. Now we can summarize our data as follows:

Selling price P $20.00/unit (given)

Variable cost V $10.00/unit (calculated)

Fixed cost F $500,000 (calculated)

Part 1. What is Nanotech’s projected break-even point for Nano Widgets in units for FY

2004?

QB = F/(P – V)

QB = $500,000/(20.00 – 10.00)

QB = $500,000/(10.00)

QB = 50,000 units