Break-even output
Find the sales volume needed for contribution to cover fixed costs.
What you will learn
- Calculate contribution per unit.
- Calculate and interpret break-even output.
Separate fixed and variable costs
Fixed costs do not change with output within the relevant range and time period. Variable costs change as production changes. Contribution per unit is selling price minus variable cost per unit.
Each unit sold contributes towards fixed costs first. After total contribution covers fixed costs, additional contribution increases profit under the model's assumptions.
State the model's assumptions
Break-even output divides fixed costs by positive contribution per unit. It assumes the relevant prices and costs are constant and that output is sold. If the calculation gives a fraction and units are indivisible, round up to the next whole unit needed to cover costs.
A break-even estimate is useful for planning but is not a guarantee of demand. The firm still needs to sell the calculated number of units.
Worked example
Fixed costs are $2400. Price is $10 and variable cost is $4 per unit. Find break-even output.
Show the worked solution
- Contribution per unit is 10−4=$6.
- Divide fixed costs by contribution: 2400/6.
- At that sales volume, total contribution equals fixed costs.
Answer 400 units
Common mistakes
- Use contribution, not selling price, as the denominator.
- Producing units without selling them does not generate the expected sales contribution.
What can you explain now?
Fixed costs are $1000 and contribution is $4 per unit. Find break-even output.
Compare with the explanation
250 units
1000/4=250.
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