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Break-even point

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The break-even point is achieved when a company’s total costs equal its total revenue.

The break-even point is calculated by dividing the company’s Indirect costs by its gross margin. Indirect costs are costs not directly associated with production. When sales are higher than the break-even point, the company has a profit; when sales are lower than the break-even point, there is a loss.

Dividing indirect costs by gross margin provides the break-even point in dollars. Dividing that number by the price per unit provides the break-even point in units sold.

Knowing the break-even point is important for a business because it establishes a threshold for success and helps set clear sales targets. A break-even analysis reveals how the break-even point changes when adjustments are made to the unit selling price.

More about the break-even point

The income statement below shows that ABC Co. earned $100,000 in revenue by selling 10,000 units at $10 per unit. The gross margin is 65% and the company’s indirect costs are $25,000.

In dollars, the break-even point is:

$25,000 / 65% = $38,461 Once the company reaches this level of sales, it has broken even.

In units, the break-even point is:

$38,461 / $10 = 3,846 Once the company sells this many units it has broken even.

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