ECONOMICS

Detailed explanation-1: -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.

Detailed explanation-2: -In general, a company with lower fixed costs will have a lower break-even point of sale. For example, a company with $0 of fixed costs will automatically have broken even upon the sale of the first product assuming variable costs do not exceed sales revenue.

Detailed explanation-3: -An increase in fixed cost will increase the break-even units as an increase in the numerator will increase the ratio. The break-even point is calculated as fixed cost divided by contribution per unit, so as the fixed cost increases the units required to cover the fixed cost will also increase.

Detailed explanation-4: -A reduction in unit contribution margin will require a higher volume of production to reach the break-even point. Lower sales prices will decrease the contribution margin per unit and cause the break-even point in unit sales to increase. Lower sales prices can be the result of aggressive discounts or weak demand.

Detailed explanation-5: -To calculate the break-even point in units use the formula: Break-Even point (units) = Fixed Costs ÷ (Sales price per unit – Variable costs per unit) or in sales dollars using the formula: Break-Even point (sales dollars) = Fixed Costs ÷ Contribution Margin. Here’s What We’ll Cover: What Is the Break-Even Point?