Accounting and Economic Break-Even Units

The Break-Even Point refers to the necessary level of output for a company’s revenue to be

equal to its total costs. Said differently, the break-even point is the inflection point at which a

company begins to generate a profit.

By understanding the required output to break even, a company can set revenue targets

accordingly, as well as adjust its business strategy such as the pricing of its products/services

and how it chooses to allocate its capital.

If a company has reached its break-even point, this means the company is operating at

neither a net loss nor a net gain (i.e., “broken even”).

Break-Even Units (Point) Formula

The formula for calculating the break-even point involves taking the total fixed costs and

Depreciation and dividing the amount by the contribution margin per unit.

To take a step back, the contribution margin is the selling price per unit minus the variable

costs per unit, and this metric represents the amount of revenue remaining after meeting all of

the associated variable costs accumulated to generate that revenue.

That said, when a company’s contribution margin (in dollar terms) is equal to its fixed costs,

the company is at its break-even point. If its contribution margin exceeds its fixed costs, then

the company actually starts profiting from the sale of its products/services. Then from Income

Statement we know that:

Sale (Price Per Unit* Number of Units) -Variable Costs (Cost Per Unit*Number of Units) -

Fixed Costs-Depreciation=Pre-Tax profit

At Accounting Break Even Units, the Pre-tax Profit is equal to Zero

Then the above equation can be written as follows:

(Price Per Unit* Number of Unit)-(Cost Per Unit*Number of Units)-Fixed Costs-

Depreciation=0 The we will have:

(Price Per Unit* Number of Units)–(Cost Per Unit*Number of Units)=Fixed Costs+

Depreciation

The above formula shows that fixed costs are not dependent on the number of units sold or

produced.

(Price Per Unit-Cost Per Unit)*Number of Units = Fixed Costs+ Depreciation

Please note that (Price-Cost Per Unit)=Contribution Margin

Then Accounting Break Even Units can be calculated as below:

Accounting Break Even Units or Number of Units=(Fixed Costs +Depreciation)/(Price-Cost

Per Unit)

Now we need to know that at the Accounting Break Even (ABE) Units, the NPV will be

negative as at the ABE Unit, we are able to cover only expenses but we can not cover the capital

costs then to not have a negative NPV, and to know the minimum sales that we need to have

to not have a negative NPV, we consider the NPV=0, then we need to calculate the ABE Unitts

from the below steps:

Economic Break-Even Units once NPV=0

First, we need to put Zero for the NPV formula then calculate the OCF from the below formula:

NPV= -Initial Investments+ OCF*((1-1/(1+r)^n)/r)

Then OCF = Initial Investments / ((1 / r) – {1 / [r(1 + r)n]})

After that we need to go backward from down of Income statement to Up of Income statement

to find the Economic Break-Even Units.

OCF- Depreciation=Net Income

Net Income/1-Tax=EBIT or Pre-Tax Profit

Pre-Tax Profit=Sales-Variable Costs-Fixed Cost-Depreciation

Total contribution is needed=Pre-Tax Profit +Fixed Costs +Depreciation

Contribution Per Unit=Price Per Unit-Variable Cost Per Unit

Then Economic Break-Even Units=Total Contribution is needed=(Pre-Tax Profit +Fixed

Costs+ Depreciation)/Contribution Per Unit (Price Per Unit-Variable Cost Per Unit)

Source: https://www.wallstreetprep.com/knowledge/break-even-point/