Accounting Break Even

The most widely used measure of break-even is accounting break-even. The accounting break-even point is simply the sales level that results in a zero project net income.

To determine a project's accounting break-even, we start off with some common sense. Suppose we retail one-terabyte computer diskettes for $5 apiece. We can buy diskettes from a wholesale supplier for $3 apiece. We have accounting expenses of $600 in fixed costs and $300 in depreciation. How many diskettes do we have to sell to break even, that is, for net income to be zero?

For every diskette we sell, we pick up $5 - 3 = $2 towards covering our other expenses (this $2 difference between the selling price and the variable cost is often called the contribution margin per unit). We have to cover a total of $600 + 300 = $900 in accounting expenses, so we obviously need to sell $900/2 = 450 diskettes. We can check this by noting that, at a sales level of 450 units, our revenues are $5 X 450 = $2,250 and our variable costs are $3 X 450 = $1,350. The income statement is thus:

Sales

$2,250

Variable costs

1,350

Fixed costs

0 0

Post a comment