BREAKEVEN POINT

BREAKEVEN POINT
Total Cost = Total Sales

Formula:
Breakeven point = Fixed cost ÷ contribution
margin (Price – Variable cost)

1
BREAKEVEN POINT

2
BREAKEVEN POINT

3
BREAKEVEN POINT

4
 DEGREE OF OPERATING
LEVERAGE

Degree of Operating Leverage (DOL)

measures how much the operating income
of a company will change in response to a
change in sales.

5
Degree of Operating Leverage = % change in
PROFIT ÷ % change in SALES

Degree of Operating Leverage (@ Q units) =

contribution margin ÷ operating income =
sales – variable cost ÷ sales – variable cost –
fixed cost
Example:
As a hypothetical example, say Company X
has $500,000 in sales in year one and
$600,000 in sales in year two. In year one,
the company's operating expenses were
$150,000, while in year two, the operating
expenses were $175,000.
 DEGREE OF OPERATING
LEVERAGE

• Year one proift = $500,000 - $150,000 = $350,000

• Year two profit = $600,000 - $175,000 = $425,000
• % change in EBIT = $425,000 / $350,000 =
1.21%
• % change in sales = $600,000 / $500,000 =1.2%
• DOL = % change in profit / % change in sales =
1.21%/1.2% = 1

8
Example:
LLC manufactures a single product and sells
it at a sales price of $500 per unit. Company
management is going to sell 12,000 units
during the next year, while the variable cost
per unit is expected to be $300 with fixed
costs of $800,000.
 DEGREE OF OPERATING
LEVERAGE

• Total Contribution Margin = 12,000 ($500 -

$300)= $2,400,000
• Operating income = 12,000 ($500 - $300) -
$800,000 = $1,600,000
• DOL = Contribution margin / operating income =
$2,400,000/$1,600,000 = 1.5

10