How to calculate the Break-even Point

Cost Accounting

What you need

• The selling price per unit, assumed constant for the period.
• Total fixed costs for the period (for example rent, fixed salaries, depreciation).
• The variable cost per unit (for example raw materials, direct labour per unit).
• The assumption that every unit produced is sold and that only one product is sold.

Step by step

1. 1

   Collect and classify the cost data

   List every price and cost figure. Example: Perniagaan Setia makes one type of school bag. The selling price is RM50 per unit, the variable cost is RM30 per unit (fabric RM18, zip and accessories RM7, direct labour RM5), and total monthly fixed cost is RM40,000 (rent RM25,000 and supervisor salary RM15,000). Make sure every figure refers to the same period, here one month.

2. 2

   Separate fixed and variable costs

   Classify each cost correctly because this decides the formula. Fixed cost does not change with quantity, so it stays RM40,000 no matter how many units are made. Variable cost changes with output; if 100 bags are made, variable cost = 100 × RM30 = RM3,000. For Perniagaan Setia, fixed cost = RM40,000 and variable cost per unit = RM30.

3. 3

   Calculate the contribution margin per unit

   Contribution margin per unit = selling price per unit − variable cost per unit. For Perniagaan Setia: RM50 − RM30 = RM20. This means every bag sold contributes RM20, first to cover fixed cost and, once fixed cost is fully covered, to profit. This contribution margin is the basis of the break-even calculation.

4. 4

   Set up the equation (equation method)

   Use the basic relationship: Sales = Variable cost + Fixed cost + Profit. At the break-even point, Profit = RM0. Let x = number of units. Then Sales = 50x and Variable cost = 30x, giving the equation 50x = 30x + 40,000 + 0. Notice that the revenue term is placed on the left and all costs on the right.

5. 5

   Solve the equation for break-even units

   Collect the x terms: 50x − 30x = 40,000, so 20x = 40,000 and x = 40,000 ÷ 20 = 2,000 units. Notice that 20 is the contribution margin per unit, so there is a short formula: Break-even point (units) = Fixed cost ÷ contribution margin per unit = 40,000 ÷ 20 = 2,000 units. Both approaches give the same answer.

6. 6

   Convert break-even units to a sales value (RM)

   Multiply the break-even units by the selling price per unit: 2,000 × RM50 = RM100,000. A second way uses the contribution margin ratio = contribution margin ÷ sales = 20 ÷ 50 = 0.4. Then Break-even point (RM) = Fixed cost ÷ contribution margin ratio = 40,000 ÷ 0.4 = RM100,000. Both methods give RM100,000.

7. 7

   Check the answer with a proof

   Test at 2,000 units: Sales = 2,000 × RM50 = RM100,000; Variable cost = 2,000 × RM30 = RM60,000; contribution margin = RM100,000 − RM60,000 = RM40,000; less fixed cost RM40,000, profit = RM0. Because profit comes to zero, the calculation is confirmed correct. This check helps you catch arithmetic slips.

8. 8

   Interpret and apply the result

   Interpretation: Perniagaan Setia must sell at least 2,000 bags (worth RM100,000) a month to break even, and every bag above 2,000 units earns RM20 of profit. If the owner expects to sell 2,600 bags, the margin of safety = 2,600 − 2,000 = 600 bags, meaning sales could fall by 600 bags before a loss begins. This information guides sales targets and risk assessment.

Second example

Kedai Harmoni sells one type of cake. The selling price is RM80 per unit, the variable cost is RM50 per unit, and monthly fixed cost is RM60,000. Contribution margin per unit = RM80 − RM50 = RM30. Break-even point (units) = RM60,000 ÷ RM30 = 2,000 units, equal to a sales value of 2,000 × RM80 = RM160,000. Now suppose the owner wants a target profit of RM30,000 a month. Substitute into the equation: 80x = 50x + 60,000 + 30,000, so 30x = 90,000 and x = 3,000 units. Kedai Harmoni therefore needs to sell 2,000 cakes to break even but 3,000 cakes to earn RM30,000 of profit. This shows the same formula can be extended by adding the target profit to the numerator.

Common mistakes

Related chapter: Cost Accounting →

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