Break-even Point- Accounting – Flashcards

Fixed Expenses do not change in total when there is a modest change in sales.

An example of a fixed expense would be a 5% sales commission.

Property taxes and rent are often fixed expenses.

Variable expenses change in total as volume changes.

An example of a variable expense is an office manager's monthly salary.

A retailer's cost of goods sold is an example of a variable expense.

Contribution margin is defined as sales (or revenues) minus variable expenses.

Break-even point is the point where revenues equal the total of all expenses including the cost of goods sold.

The break-even point in dollars of revenues is equal to the total of the fixed expenses divided by the contribution margin per unit.

If a company requires a profit of $30,000 (instead of breaking even), the $30,000 should be combined with the fixed expenses in order to compute the point at which the company will earn $30,000.

If a company has mixed expenses, the fixed component can be combined with the company's fixed expenses and the variable component can be combined with the company's variable expenses.

Decreasing a company's fixed expenses should reduce the break-even point.

The contribution margin per unit is the selling price per unit minus the fixed expenses per unit.

Break-even analysis is useful for companies that sell products, but it is not useful for companies that provide services.

What is the company's contribution margin?

What is the break-even point in units?

If the company wants to earn a profit of $42,000 instead of breaking even, what is the number of units the company must sell?