Accounting breakeven point definition
/What is the Accounting Breakeven Point?
The accounting breakeven point is the sales level at which a business generates exactly zero profits, given a certain amount of fixed costs that it must pay for in each period. This concept is used to model the financial structure of a business. If the breakeven point is too high, then a business may not be able to ever earn a profit, especially when its maximum capacity level is the same as or less than its breakeven point.
The calculation of the accounting breakeven point is a three-step process, which is described below.
Step 1. Determine Contribution Margin
Determine the contribution margin generated by all of the company's products in aggregate. This is net sales minus all variable costs associated with those sales (which is at least direct materials and commissions). Thus, if a business has sales of $1,000,000, direct materials costs of $280,000, and commissions of $20,000, its contribution margin is $700,000 and its contribution margin percentage is 70%.
Step 2. Determine Fixed Costs
Calculate the total amount of fixed costs that the business incurs in an accounting period, such as for rent, salaries, and interest expense. This can require some analysis to determine, since some costs may contain both fixed and variable elements (known as mixed costs); in these cases, you will need to determine which portion of the cost is fixed, and which portion varies with some associated volume measure.
Step 3. Calculate Breakeven Point
Divide the total fixed cost by the contribution margin percentage to arrive at the breakeven sales point. In our continuing example, this means that having fixed costs of $500,000 results in a breakeven sales level of $714,285 (calculated as $500,000 of fixed costs divided by the 70% contribution margin).
If we assume that the "accounting" breakeven point refers to the accrual basis of accounting, then the fixed cost portion of the breakeven calculation should include all expense accruals normally required under the accrual basis of accounting. Alternatively, you could develop a "cash" breakeven point where the fixed cost portion of the calculation only includes costs recorded under the cash basis of accounting.
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FAQs
Can Breakeven Analysis Handle Multiple Products?
Yes. Breakeven analysis can handle multiple products by using a weighted-average contribution margin based on the expected sales mix. The result is only reliable if the sales mix remains stable; shifts in mix can quickly invalidate the calculation.
What is the Difference Between Accounting Breakeven and Cash Breakeven?
Accounting breakeven considers all fixed costs, including non-cash items such as depreciation. Cash breakeven excludes non-cash expenses and focuses only on the level of sales needed to cover actual cash outflows. Cash breakeven is typically lower because it ignores depreciation and similar non-cash charges.