Breakeven Formula
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CPA Auditing and Attestation (AUD) › Breakeven Formula
Breakeven analysis assumes that over the relevant range:
Unit revenues are nonlinear
Unit variable costs are unchanged
Total fixed costs are nonlinear
Total costs are unchanged
Explanation
Breakeven analysis assumes that all variable costs and revenues are constant on a per-unit basis and are linear over a relevant range. Fixed costs in total are constant.
ABC company's breakeven point was \$780,000. Variable expenses averaged 60% of sales, and the margin of safety was \$130,000. What was ABC's contribution margin?
\$364,000
\$546,000
\$1,300,000
\$910,000
Explanation
The margin of safety is the excess of sales over break-even sales. Assuming variable costs are 60% of selling price, contribution margin may be computed at 40% of selling price as 40% * $780,000 + 40% * $130,000.
A company has total sales of \$80,000, total variable costs of \$20,000, and total fixed costs of \$30,000. What is the breakeven level in sales dollars?
\$50,000
\$30,000
\$40,000
\$80,000
Explanation
The contribution margin is sales minus variable costs (80,000-20,000) = 60,000. Then, 60,000/80,000=75%. Then, breakeven is total fixed costs of $30,000/75%=$40,000.
A product has sales of \$200,000, a contribution margin of 20%, and a margin of safety of \$80,000. What is the product's fixed cost?
\$16,000
\$96,000
\$80,000
\$24,000
Explanation
($200,000 - $80,000) * 20%
What is the formula for breakeven point in units?
Total FC/CM per Unit
Total VC/CM per Unit
Total Costs/CM per Unit
CM per Unit/Total FC
Explanation
This is the formula for breakeven point in units.
How does the margin of safety relate to breakeven in units or sales? It is:
The excess of sales over breakeven sales
A measure of profitability
The excess of breakeven sales over sales
Unrelated
Explanation
The margin of safety is generally expressed as either dollars or a percentage and is the excess of sales over breakeven sales.