1. @ 2012, Cengage Learning Cost Behavior and Cost-Volume-Profit Analysis LO 3a – Understanding Break-Even

2. Break-Even Point  The break-even point is the level of operations at which a company’s revenues and expenses are equal. LO 3

3. Break-Even Point LO 3 Fixed costs$90,000 Unit selling price$25 Unit variable cost 15 Unit contribution margin$10 Assume the following data for Baker Corporation:

4. The break-even point (in sales units) is calculated using the following equation: Break-Even Sales (units) = Fixed Costs Unit Contribution Margin Break-Even Sales (units) = $90,000 $10 Break-Even Sales (units) = 9,000 units Break-Even Point LO 3

5. Break-Even Point LO 3 Income from operations is zero when 9,000 units are sold— hence, the break-even point is 9,000 units.

6. Break-Even Point LO 3 The break-even point (in sales dollars) is calculated using the following equation: Break-Even Sales (dollars) = Fixed Costs Contribution Margin Ratio Break-Even Sales (dollars) = $225,000 $90,000.40 Break-Even Sales (dollars) = $10 $25

7. Effect of Changes in Fixed Costs Fixed Costs If Break- Even Break- Even then Fixed Costs Fixed Costs If then Break- Even Break- Even LO 3