Basic Formulas for Break-even Point (BEP): Calculation Methods &

School: Polytechnic University of Puerto Rico - Course: BSA 3 - Subject: Accounting

Basic Formulas in Break even Point (BEP) Breakeven calculations can be demonstrated using the formula, graphical presentation and income statement approaches. Formula approach is a method that use a certainequation or formula to compute break-even point. Graphical presentationapproach wherein the break- even point or cost volume profit relationship can also be examined using graphs. Income statement approach is a method wherein it express income in equation form and then break it down into it's components. But let's focus to formula approach in computing break even point. Formula approach in computing BEP EQUATION APPROACH - it uses an algebraic equation to calculate the BEP. In this analysis , sales volume, rather than production activity is the focus of the relevant range. The equation is represents the variable costing income statement and shows the relationship among revenue, fixed cost, variable cost, volume and profit. P= S ( X) - VC ( X)- FC whereinS = sales ( selling price)per unit X = volume ( number of units) S(X) = total sales VC = variable cost per unit VC( X) = total variable cost FC = total fixed cost P = profit The above equation is simply represent an income statement ,P can be set equal to zero to solve for the break-even point. At this point where P isequal to zero, total revenue equals total cost and BEP in units can be solve by using the formula of X = Sales - Variable cost - Fixed cost CONTRIBUTION MARGIN APPROACH - Contribution margin and contribution margin ratio are CVP analysis concepts that are used to calculate the break-even point . The difference between sales and variable costs is known as contribution margin. It's called unit contribution margin when it's calculated for a single unit. The contribution margin ratio is the proportion of profit to sales. By rearranging the equation and replacing specific parts with Contribution Margin formulas, simple formulas can be generated from the CVP analysis equation.To calculate the breakeven pointin units and in peso using contribution margin approach you can use this formula BEP in units = Total fixed cost ÷ Contribution margin per unit BEP in peso = Total fixed cost ÷ Contribution margin ratio Alternative formula to compute BEP in peso = BEP in units × Selling price