{"id":77,"date":"2021-01-26T22:00:58","date_gmt":"2021-01-26T22:00:58","guid":{"rendered":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/?post_type=chapter&#038;p=77"},"modified":"2021-08-16T00:43:02","modified_gmt":"2021-08-16T00:43:02","slug":"break-even","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/chapter\/break-even\/","title":{"raw":"Break Even","rendered":"Break Even"},"content":{"raw":"<div class=\"textbox learning-objectives\">\r\n<h3>Learning Outcomes<\/h3>\r\n<ul>\r\n \t<li>Calculate break-even point<\/li>\r\n<\/ul>\r\n<\/div>\r\nThe <strong>break-even point<\/strong> is the number of units sold or the dollar amount of sales that must be achieve to have an operating income of zero. At the break-even point, sales in dollars equal costs. The break-even calculation answers the question: How many units does the company have to sell to pay all its expenses for the month? Or, how much do I have to makes in sales (dollars) to break-even?\r\n\r\nLet\u2019s follow the BlankBooks example as we explore how to use the CVP analysis model in order to solve this business problem.<img class=\"size-medium wp-image-777 alignright\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5469\/2021\/01\/17150454\/tom-hermans-9BoqXzEeQqM-unsplash-300x200.jpg\" alt=\"Multiple books on a cart.\" width=\"300\" height=\"200\" \/>\r\n\r\nBlankBooks, Inc. purchases raw materials (paper and bindings) and converts those to finished goods (blank journals). The company uses a Just-In-Time inventory management system for work-in-process and finished goods, so the only inventory on hand at the end of each month is raw materials.\r\n\r\nHere is the data we have to work with from the month of July, 20XX:\r\n<div align=\"left\">\r\n<table class=\"fin-table gridded\">\r\n<tbody>\r\n<tr>\r\n<td>Bindings<\/td>\r\n<td class=\"r highlight\">$5.00<\/td>\r\n<td class=\"l\">each<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Pages (preassembled, ready to bind)<\/td>\r\n<td class=\"r highlight\">$1.00<\/td>\r\n<td class=\"l\">each<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Labor per piece assembled<\/td>\r\n<td class=\"r highlight\">$2.00<\/td>\r\n<td class=\"l\">each<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Sales Salary<\/td>\r\n<td class=\"r highlight\">$2,000.00<\/td>\r\n<td class=\"l\">per month<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Commission<\/td>\r\n<td class=\"r highlight\">3.00%<\/td>\r\n<td class=\"l\">each<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Internet and web site<\/td>\r\n<td class=\"r highlight\">$200.00<\/td>\r\n<td class=\"l\">per month<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Production facility rent<\/td>\r\n<td class=\"r highlight\">$1,200.00<\/td>\r\n<td class=\"l\">per month<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Sales Price<\/td>\r\n<td class=\"r highlight\">$10.00<\/td>\r\n<td class=\"l\">each<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n&nbsp;\r\n\r\n<\/div>\r\nFirst, we sorted out the variable and fixed costs:\r\n<div align=\"left\">\r\n<table class=\"fin-table acctstatement fw\">\r\n<thead>\r\n<tr class=\"u-sr-only\">\r\n<th scope=\"col\">Description<\/th>\r\n<th scope=\"col\">Amount<\/th>\r\n<th scope=\"col\">Total<\/th>\r\n<\/tr>\r\n<\/thead>\r\n<tbody>\r\n<tr>\r\n<td>Variable Costs (per unit)<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Bindings<\/td>\r\n<td><\/td>\r\n<td class=\"r\">$ \u00a0 \u00a0 \u00a05.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Pages (preassembled, ready to bind)<\/td>\r\n<td><\/td>\r\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 1.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Labor per piece assembled<\/td>\r\n<td><\/td>\r\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 2.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td colspan=\"3\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Commission<\/strong><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Sales price<\/td>\r\n<td class=\"r\">$10.00<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0X rate<\/td>\r\n<td class=\"r\">3.00%<\/td>\r\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 0.30<\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$ \u00a0\u00a0\u00a0\u00a0 8.30<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Fixed Costs<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Sales Salary<\/td>\r\n<td><\/td>\r\n<td class=\"r\">$\u00a0 2,000.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Internet and web site<\/td>\r\n<td><\/td>\r\n<td class=\"r\">\u00a0 \u00a0 200.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Production facility rent<\/td>\r\n<td><\/td>\r\n<td class=\"r\">1,200.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 3,400.00<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n&nbsp;\r\n\r\nThen, we created a contribution margin statement from this data. In order to do this, we made an initial guess of 2,500 units that we could sell (and because we\u2019re using a JIT inventory system, production will match sales).\r\n<div align=\"left\">\r\n<table class=\"fin-table acctstatement fw\"><caption>BlankBooks, Inc.\r\nCVP Analysis\r\nFor the month ending July 31, 20XX<\/caption>\r\n<tbody>\r\n<tr>\r\n<th class=\"r\" scope=\"col\"><\/th>\r\n<th class=\"r\" scope=\"col\">Units<\/th>\r\n<th class=\"r\" scope=\"col\">$\/Unit<\/th>\r\n<th class=\"r\" scope=\"col\">Total<\/th>\r\n<\/tr>\r\n<\/tbody>\r\n<tbody>\r\n<tr>\r\n<td>Sales<\/td>\r\n<td class=\"r\">2,500<\/td>\r\n<td class=\"r\">$\u00a0\u00a0\u00a0\u00a0\u00a010.00<\/td>\r\n<td class=\"r\">$\u00a0\u00a0\u00a0\u00a0\u00a025,000.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Variable costs<\/td>\r\n<td class=\"r\">2,500<\/td>\r\n<td class=\"r\">$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a08.30<\/td>\r\n<td class=\"r\">20,750.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Contribution Margin<\/td>\r\n<td><\/td>\r\n<td class=\"r\">$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a01.70<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>4,250.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Fixed costs<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td class=\"r\">$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a03,400.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Operating income<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0850.00<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>CM ratio<\/td>\r\n<td><\/td>\r\n<td class=\"r\">17.00%<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n&nbsp;\r\n\r\nWhat is your best guess for the units of production that will result in a break-even point, where contribution margin just covers fixed costs with almost $0 profit?\r\n\r\nLet\u2019s try 1,400 units:\r\n<div align=\"left\">\r\n<table class=\"fin-table acctstatement fw\"><caption>BlankBooks, Inc.\r\nCVP Analysis - projections\r\nFor the month ending July 31, 20XX<\/caption>\r\n<tbody>\r\n<tr>\r\n<th class=\"r\" scope=\"col\"><\/th>\r\n<th class=\"r\" scope=\"col\">Units<\/th>\r\n<th class=\"r\" scope=\"col\">$\/Unit<\/th>\r\n<th class=\"r\" scope=\"col\">Total<\/th>\r\n<\/tr>\r\n<\/tbody>\r\n<tbody>\r\n<tr>\r\n<td>Sales<\/td>\r\n<td class=\"r\">1,400<\/td>\r\n<td class=\"r\">$\u00a0\u00a0\u00a0\u00a0\u00a010.00<\/td>\r\n<td class=\"r\">$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a014,000.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Variable costs<\/td>\r\n<td class=\"r\">1,400<\/td>\r\n<td class=\"r\">$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a08.30<\/td>\r\n<td class=\"r\">11,620.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Contribution Margin<\/td>\r\n<td><\/td>\r\n<td class=\"r\">$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a01.70<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>2,380.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Fixed costs<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td class=\"r\">\u00a0\u00a0\u00a0\u00a0\u00a0\u00a03,400.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Operating income<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0\u00a0\u00a0\u00a0\u00a0(1,020.00)<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>CM ratio<\/td>\r\n<td><\/td>\r\n<td class=\"r\">17.00%<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n&nbsp;\r\n\r\nAt the 1,400 units sales\/production level, we lose money. We could continue to guess, rerunning the calculation until we came close to $0 profit, but there is an easier way.\r\n\r\nWe know each unit provides $1.70 in contribution margin. The contribution margin covers fixed costs and profit.\r\n\r\nIn this case, we want to know the point where profit is closest to $0, which means all we have to do is cover fixed costs of $3,400.\r\n\r\nDivide fixed costs by contribution margin per unit:\r\n\r\n3,400\/1.70 = 2000 units.\r\n\r\nWe can enter that into our Contribution Margin statement to see if it works:\r\n<div align=\"left\">\r\n<table class=\"fin-table acctstatement fw\"><caption>BlankBooks, Inc.\r\nCVP Analysis - estimated break-even point\r\nFor the month ending July 31, 20XX<\/caption>\r\n<tbody>\r\n<tr>\r\n<th class=\"r\" scope=\"col\"><\/th>\r\n<th class=\"r\" scope=\"col\">Units<\/th>\r\n<th class=\"r\" scope=\"col\">$\/Unit<\/th>\r\n<th class=\"r\" scope=\"col\">Total<\/th>\r\n<\/tr>\r\n<\/tbody>\r\n<tbody>\r\n<tr>\r\n<td>Sales<\/td>\r\n<td class=\"r\">2,000<\/td>\r\n<td class=\"r\">$\u00a0\u00a0\u00a0\u00a0\u00a010.00<\/td>\r\n<td class=\"r\">$\u00a0\u00a020,000.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Variable costs<\/td>\r\n<td class=\"r\">2,000<\/td>\r\n<td class=\"r\">$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a08.30<\/td>\r\n<td class=\"r\">16,600.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Contribution Margin<\/td>\r\n<td><\/td>\r\n<td class=\"r\">$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a01.70<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>3,400.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Fixed costs<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td class=\"r\">\u00a0\u00a0\u00a0\u00a0\u00a0\u00a03,400.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Operating income<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a00.00<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>CM ratio<\/td>\r\n<td><\/td>\r\n<td class=\"r\">17.00%<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n&nbsp;\r\n\r\nYou could also calculate the break-even point by dividing fixed costs by the contribution margin ratio, which will give you the break-even point in sales dollars:\r\n\r\n$3,400 \/ .17 = $20,000.00\r\n\r\nSince each unit sells for $10.00, the number of units we need to sell just to break-even would be:\r\n\r\n20,000.00 \/ 10.00 = 2,000\r\n\r\nIf the break-even point is greater than the actual production capacity, the company will operate at a loss. Likewise, if the break-even point is greater than the organization\u2019s sales capacity, it will operate at a loss. We expect our student workers to make 25 books an hour, so to make 2,000 books per month, we\u2019ll need 80 hours of labor, or approximately 20 hours per week. In addition, we\u2019ll need the raw materials on hand or at least a steady supply during the month.\r\n\r\nHere is a review of calculating break-even:\r\n\r\n<iframe src=\"\/\/plugin.3playmedia.com\/show?mf=6352531&amp;p3sdk_version=1.10.1&amp;p=20361&amp;pt=375&amp;video_id=Nw2IioaF6Lc&amp;video_target=tpm-plugin-81b8d2xi-Nw2IioaF6Lc\" width=\"800px\" height=\"450px\" frameborder=\"0\" marginwidth=\"0px\" marginheight=\"0px\"><\/iframe>\r\n\r\nYou can view the <a href=\"https:\/\/oerfiles.s3.us-west-2.amazonaws.com\/Managerial+Accounting\/Transcripts\/CostVolumeProfitAnalysisCVP_transcript.txt\" target=\"_blank\" rel=\"noopener\">transcript for \"Cost Volume Profit Analysis (CVP): calculating the Break Even Point\" here (opens in new window)<\/a>.\r\n\r\nBefore we adapt this model to accommodate a target profit, let\u2019s check your understanding of the break-even analysis.\r\n<div class=\"textbox tryit\">\r\n<h3>Practice Questions<\/h3>\r\n[ohm_question hide_question_numbers=1]217761-217762[\/ohm_question]\r\n\r\n<\/div>","rendered":"<div class=\"textbox learning-objectives\">\n<h3>Learning Outcomes<\/h3>\n<ul>\n<li>Calculate break-even point<\/li>\n<\/ul>\n<\/div>\n<p>The <strong>break-even point<\/strong> is the number of units sold or the dollar amount of sales that must be achieve to have an operating income of zero. At the break-even point, sales in dollars equal costs. The break-even calculation answers the question: How many units does the company have to sell to pay all its expenses for the month? Or, how much do I have to makes in sales (dollars) to break-even?<\/p>\n<p>Let\u2019s follow the BlankBooks example as we explore how to use the CVP analysis model in order to solve this business problem.<img loading=\"lazy\" decoding=\"async\" class=\"size-medium wp-image-777 alignright\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5469\/2021\/01\/17150454\/tom-hermans-9BoqXzEeQqM-unsplash-300x200.jpg\" alt=\"Multiple books on a cart.\" width=\"300\" height=\"200\" \/><\/p>\n<p>BlankBooks, Inc. purchases raw materials (paper and bindings) and converts those to finished goods (blank journals). The company uses a Just-In-Time inventory management system for work-in-process and finished goods, so the only inventory on hand at the end of each month is raw materials.<\/p>\n<p>Here is the data we have to work with from the month of July, 20XX:<\/p>\n<div style=\"text-align: left;\">\n<table class=\"fin-table gridded\">\n<tbody>\n<tr>\n<td>Bindings<\/td>\n<td class=\"r highlight\">$5.00<\/td>\n<td class=\"l\">each<\/td>\n<\/tr>\n<tr>\n<td>Pages (preassembled, ready to bind)<\/td>\n<td class=\"r highlight\">$1.00<\/td>\n<td class=\"l\">each<\/td>\n<\/tr>\n<tr>\n<td>Labor per piece assembled<\/td>\n<td class=\"r highlight\">$2.00<\/td>\n<td class=\"l\">each<\/td>\n<\/tr>\n<tr>\n<td>Sales Salary<\/td>\n<td class=\"r highlight\">$2,000.00<\/td>\n<td class=\"l\">per month<\/td>\n<\/tr>\n<tr>\n<td>Commission<\/td>\n<td class=\"r highlight\">3.00%<\/td>\n<td class=\"l\">each<\/td>\n<\/tr>\n<tr>\n<td>Internet and web site<\/td>\n<td class=\"r highlight\">$200.00<\/td>\n<td class=\"l\">per month<\/td>\n<\/tr>\n<tr>\n<td>Production facility rent<\/td>\n<td class=\"r highlight\">$1,200.00<\/td>\n<td class=\"l\">per month<\/td>\n<\/tr>\n<tr>\n<td>Sales Price<\/td>\n<td class=\"r highlight\">$10.00<\/td>\n<td class=\"l\">each<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>&nbsp;<\/p>\n<\/div>\n<p>First, we sorted out the variable and fixed costs:<\/p>\n<div style=\"text-align: left;\">\n<table class=\"fin-table acctstatement fw\">\n<thead>\n<tr class=\"u-sr-only\">\n<th scope=\"col\">Description<\/th>\n<th scope=\"col\">Amount<\/th>\n<th scope=\"col\">Total<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td>Variable Costs (per unit)<\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Bindings<\/td>\n<td><\/td>\n<td class=\"r\">$ \u00a0 \u00a0 \u00a05.00<\/td>\n<\/tr>\n<tr>\n<td>Pages (preassembled, ready to bind)<\/td>\n<td><\/td>\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 1.00<\/td>\n<\/tr>\n<tr>\n<td>Labor per piece assembled<\/td>\n<td><\/td>\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 2.00<\/td>\n<\/tr>\n<tr>\n<td colspan=\"3\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Commission<\/strong><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Sales price<\/td>\n<td class=\"r\">$10.00<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0X rate<\/td>\n<td class=\"r\">3.00%<\/td>\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 0.30<\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$ \u00a0\u00a0\u00a0\u00a0 8.30<span class=\"u-sr-only\">Double line<\/span><\/td>\n<\/tr>\n<tr>\n<td>Fixed Costs<\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Sales Salary<\/td>\n<td><\/td>\n<td class=\"r\">$\u00a0 2,000.00<\/td>\n<\/tr>\n<tr>\n<td>Internet and web site<\/td>\n<td><\/td>\n<td class=\"r\">\u00a0 \u00a0 200.00<\/td>\n<\/tr>\n<tr>\n<td>Production facility rent<\/td>\n<td><\/td>\n<td class=\"r\">1,200.00<\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 3,400.00<span class=\"u-sr-only\">Double line<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p>&nbsp;<\/p>\n<p>Then, we created a contribution margin statement from this data. In order to do this, we made an initial guess of 2,500 units that we could sell (and because we\u2019re using a JIT inventory system, production will match sales).<\/p>\n<div style=\"text-align: left;\">\n<table class=\"fin-table acctstatement fw\">\n<caption>BlankBooks, Inc.<br \/>\nCVP Analysis<br \/>\nFor the month ending July 31, 20XX<\/caption>\n<tbody>\n<tr>\n<th class=\"r\" scope=\"col\"><\/th>\n<th class=\"r\" scope=\"col\">Units<\/th>\n<th class=\"r\" scope=\"col\">$\/Unit<\/th>\n<th class=\"r\" scope=\"col\">Total<\/th>\n<\/tr>\n<\/tbody>\n<tbody>\n<tr>\n<td>Sales<\/td>\n<td class=\"r\">2,500<\/td>\n<td class=\"r\">$\u00a0\u00a0\u00a0\u00a0\u00a010.00<\/td>\n<td class=\"r\">$\u00a0\u00a0\u00a0\u00a0\u00a025,000.00<\/td>\n<\/tr>\n<tr>\n<td>Variable costs<\/td>\n<td class=\"r\">2,500<\/td>\n<td class=\"r\">$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a08.30<\/td>\n<td class=\"r\">20,750.00<\/td>\n<\/tr>\n<tr>\n<td>Contribution Margin<\/td>\n<td><\/td>\n<td class=\"r\">$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a01.70<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>4,250.00<\/td>\n<\/tr>\n<tr>\n<td>Fixed costs<\/td>\n<td><\/td>\n<td><\/td>\n<td class=\"r\">$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a03,400.00<\/td>\n<\/tr>\n<tr>\n<td>Operating income<\/td>\n<td><\/td>\n<td><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0850.00<span class=\"u-sr-only\">Double line<\/span><\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>CM ratio<\/td>\n<td><\/td>\n<td class=\"r\">17.00%<\/td>\n<td><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p>&nbsp;<\/p>\n<p>What is your best guess for the units of production that will result in a break-even point, where contribution margin just covers fixed costs with almost $0 profit?<\/p>\n<p>Let\u2019s try 1,400 units:<\/p>\n<div style=\"text-align: left;\">\n<table class=\"fin-table acctstatement fw\">\n<caption>BlankBooks, Inc.<br \/>\nCVP Analysis &#8211; projections<br \/>\nFor the month ending July 31, 20XX<\/caption>\n<tbody>\n<tr>\n<th class=\"r\" scope=\"col\"><\/th>\n<th class=\"r\" scope=\"col\">Units<\/th>\n<th class=\"r\" scope=\"col\">$\/Unit<\/th>\n<th class=\"r\" scope=\"col\">Total<\/th>\n<\/tr>\n<\/tbody>\n<tbody>\n<tr>\n<td>Sales<\/td>\n<td class=\"r\">1,400<\/td>\n<td class=\"r\">$\u00a0\u00a0\u00a0\u00a0\u00a010.00<\/td>\n<td class=\"r\">$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a014,000.00<\/td>\n<\/tr>\n<tr>\n<td>Variable costs<\/td>\n<td class=\"r\">1,400<\/td>\n<td class=\"r\">$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a08.30<\/td>\n<td class=\"r\">11,620.00<\/td>\n<\/tr>\n<tr>\n<td>Contribution Margin<\/td>\n<td><\/td>\n<td class=\"r\">$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a01.70<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>2,380.00<\/td>\n<\/tr>\n<tr>\n<td>Fixed costs<\/td>\n<td><\/td>\n<td><\/td>\n<td class=\"r\">\u00a0\u00a0\u00a0\u00a0\u00a0\u00a03,400.00<\/td>\n<\/tr>\n<tr>\n<td>Operating income<\/td>\n<td><\/td>\n<td><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0\u00a0\u00a0\u00a0\u00a0(1,020.00)<span class=\"u-sr-only\">Double line<\/span><\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>CM ratio<\/td>\n<td><\/td>\n<td class=\"r\">17.00%<\/td>\n<td><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p>&nbsp;<\/p>\n<p>At the 1,400 units sales\/production level, we lose money. We could continue to guess, rerunning the calculation until we came close to $0 profit, but there is an easier way.<\/p>\n<p>We know each unit provides $1.70 in contribution margin. The contribution margin covers fixed costs and profit.<\/p>\n<p>In this case, we want to know the point where profit is closest to $0, which means all we have to do is cover fixed costs of $3,400.<\/p>\n<p>Divide fixed costs by contribution margin per unit:<\/p>\n<p>3,400\/1.70 = 2000 units.<\/p>\n<p>We can enter that into our Contribution Margin statement to see if it works:<\/p>\n<div style=\"text-align: left;\">\n<table class=\"fin-table acctstatement fw\">\n<caption>BlankBooks, Inc.<br \/>\nCVP Analysis &#8211; estimated break-even point<br \/>\nFor the month ending July 31, 20XX<\/caption>\n<tbody>\n<tr>\n<th class=\"r\" scope=\"col\"><\/th>\n<th class=\"r\" scope=\"col\">Units<\/th>\n<th class=\"r\" scope=\"col\">$\/Unit<\/th>\n<th class=\"r\" scope=\"col\">Total<\/th>\n<\/tr>\n<\/tbody>\n<tbody>\n<tr>\n<td>Sales<\/td>\n<td class=\"r\">2,000<\/td>\n<td class=\"r\">$\u00a0\u00a0\u00a0\u00a0\u00a010.00<\/td>\n<td class=\"r\">$\u00a0\u00a020,000.00<\/td>\n<\/tr>\n<tr>\n<td>Variable costs<\/td>\n<td class=\"r\">2,000<\/td>\n<td class=\"r\">$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a08.30<\/td>\n<td class=\"r\">16,600.00<\/td>\n<\/tr>\n<tr>\n<td>Contribution Margin<\/td>\n<td><\/td>\n<td class=\"r\">$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a01.70<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>3,400.00<\/td>\n<\/tr>\n<tr>\n<td>Fixed costs<\/td>\n<td><\/td>\n<td><\/td>\n<td class=\"r\">\u00a0\u00a0\u00a0\u00a0\u00a0\u00a03,400.00<\/td>\n<\/tr>\n<tr>\n<td>Operating income<\/td>\n<td><\/td>\n<td><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a00.00<span class=\"u-sr-only\">Double line<\/span><\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>CM ratio<\/td>\n<td><\/td>\n<td class=\"r\">17.00%<\/td>\n<td><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p>&nbsp;<\/p>\n<p>You could also calculate the break-even point by dividing fixed costs by the contribution margin ratio, which will give you the break-even point in sales dollars:<\/p>\n<p>$3,400 \/ .17 = $20,000.00<\/p>\n<p>Since each unit sells for $10.00, the number of units we need to sell just to break-even would be:<\/p>\n<p>20,000.00 \/ 10.00 = 2,000<\/p>\n<p>If the break-even point is greater than the actual production capacity, the company will operate at a loss. Likewise, if the break-even point is greater than the organization\u2019s sales capacity, it will operate at a loss. We expect our student workers to make 25 books an hour, so to make 2,000 books per month, we\u2019ll need 80 hours of labor, or approximately 20 hours per week. In addition, we\u2019ll need the raw materials on hand or at least a steady supply during the month.<\/p>\n<p>Here is a review of calculating break-even:<\/p>\n<p><iframe loading=\"lazy\" src=\"\/\/plugin.3playmedia.com\/show?mf=6352531&amp;p3sdk_version=1.10.1&amp;p=20361&amp;pt=375&amp;video_id=Nw2IioaF6Lc&amp;video_target=tpm-plugin-81b8d2xi-Nw2IioaF6Lc\" width=\"800px\" height=\"450px\" frameborder=\"0\" marginwidth=\"0px\" marginheight=\"0px\"><\/iframe><\/p>\n<p>You can view the <a href=\"https:\/\/oerfiles.s3.us-west-2.amazonaws.com\/Managerial+Accounting\/Transcripts\/CostVolumeProfitAnalysisCVP_transcript.txt\" target=\"_blank\" rel=\"noopener\">transcript for &#8220;Cost Volume Profit Analysis (CVP): calculating the Break Even Point&#8221; here (opens in new window)<\/a>.<\/p>\n<p>Before we adapt this model to accommodate a target profit, let\u2019s check your understanding of the break-even analysis.<\/p>\n<div class=\"textbox tryit\">\n<h3>Practice Questions<\/h3>\n<p><iframe loading=\"lazy\" id=\"ohm217761\" class=\"resizable\" src=\"https:\/\/ohm.lumenlearning.com\/multiembedq.php?id=217761-217762&theme=oea&iframe_resize_id=ohm217761\" width=\"100%\" height=\"150\"><\/iframe><\/p>\n<\/div>\n\n\t\t\t <section class=\"citations-section\" role=\"contentinfo\">\n\t\t\t <h3>Candela Citations<\/h3>\n\t\t\t\t\t <div>\n\t\t\t\t\t\t <div id=\"citation-list-77\">\n\t\t\t\t\t\t\t <div class=\"licensing\"><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Original<\/div><ul class=\"citation-list\"><li>Break-Even. <strong>Authored by<\/strong>: Joseph Cooke. <strong>Provided by<\/strong>: Lumen Learning. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><\/ul><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Shared previously<\/div><ul class=\"citation-list\"><li>Multiple books on a cart. <strong>Authored by<\/strong>: Tom Hermans. <strong>Provided by<\/strong>: Unsplash. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/unsplash.com\/photos\/9BoqXzEeQqM\">https:\/\/unsplash.com\/photos\/9BoqXzEeQqM<\/a>. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/about\/cc0\">CC0: No Rights Reserved<\/a><\/em><\/li><\/ul><div class=\"license-attribution-dropdown-subheading\">All rights reserved content<\/div><ul class=\"citation-list\"><li>Cost Volume Profit Analysis (CVP): calculating the Break Even Point. <strong>Authored by<\/strong>: Education Unlocked. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/youtu.be\/Nw2IioaF6Lc\">https:\/\/youtu.be\/Nw2IioaF6Lc<\/a>. <strong>License<\/strong>: <em>All Rights Reserved<\/em>. <strong>License Terms<\/strong>: Standard YouTube License<\/li><\/ul><\/div>\n\t\t\t\t\t\t <\/div>\n\t\t\t\t\t <\/div>\n\t\t\t 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