BreakEven Sales Formula (Table of Contents)
What is the BreakEven Sales Formula?
The term “breakeven sales” refers to the sales value at which a company earns no profit no loss. In other words, the breakeven sales are the dollar amount of revenue that precisely covers the fixed expenses and the variable expenses of a business. The formula for breakeven sales can be derived by dividing the fixed costs of a company by its contribution margin percentage. Mathematically, it is represented as,
The contribution margin percentage can be computed by dividing the difference between the sales and the variable costs by the sales and expressed in terms of percentage. Mathematically it is represented as,
Contribution Margin Percentage = (Sales – Variable Costs) / Sales * 100%
Therefore, the formula for breakeven sales can be combined as,
Examples of BreakEven Sales Formula (With Excel Template)
Let’s take an example to understand the calculation of BreakEven Sales in a better manner.
BreakEven Sales Formula – Example #1
Let us take the example of a company that is engaged in the business of lather shoe manufacturing. According to the cost accountant, last year the total variable costs incurred add up to be $1,300,000 on a sales revenue of $2,000,000. Calculate the breakeven sales for the company if the fixed cost incurred during the year stood at $500,000.
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Solution:
BreakEven Sales is calculated using the formula given below
BreakEven Sales = Fixed Costs * Sales / (Sales – Variable Costs)
 BreakEven Sales = $500,000 * $2,000,000 / ($2,000,000 – $1,300,000)
 BreakEven Sales = $1,428,571
Therefore, the company has to achieve minimum sales of $1.43 million in order to break even at current mix of fixed and variable costs.
BreakEven Sales Formula – Example #2
Let us take the example of another company ASD Ltd. engaged in pizza selling that generated sales of $5,000,000 during the year. The company incurred a raw material cost of $2,500,000 and a direct labor cost of $1,500,000. On the other hand, periodic costs such as depreciation, taxes and interest expenses stood at $100,000, $50,000 and $200,500 respectively. Calculate the breakeven sales of ASD Ltd. based on the given information.
Solution:
Variable Cost is calculated using the formula given below
Variable Cost = Raw Material Cost + Direct Labor Cost
 Variable Cost = $2,500,000 + $1,500,000
 Variable Cost = $4,000,000
Fixed Costs is calculated using the formula given below
Fixed Costs = Depreciation + Taxes + Interest Expenses
 Fixed Costs = $100,000 + $50,000 + $200,500
 Fixed Costs = $350,500
BreakEven Sales is calculated using the formula given below
BreakEven Sales = Fixed Costs * Sales / (Sales – Variable Costs)
 BreakEven Sales = $350,500 * $5,000,000 / ($5,000,000 – $4,000,000)
 BreakEven Sales = $1,752,500
Therefore, to break even ASD Ltd. has to achieve minimum sales of $1.75 million.
BreakEven Sales Formula – Example #3
Let us take the example of Walmart’s annual report for the year 2018. According to the annual report, the following information is available, Calculate the breakeven sales of Walmart Inc. for the year 2018.
Solution:
Fixed Costs is calculated using the formula given below
Fixed Costs = SG & A Expenses + Interest + Taxes
 Fixed Costs = $106.51 Bn + $2.18 Bn + $4.60 Bn
 Fixed Costs = $113.29 Bn
BreakEven Sales is calculated using the formula given below
BreakEven Sales = Fixed Costs * Sales / (Sales – Variable Costs)
 BreakEven Sales = $113.29 * $495.76 / ($495.76 – $373.40)
 BreakEven Sales = $459.01 Bn
Therefore, Walmart’s break even sales for the year 2018 is $459.01 billion.
Source Link: Wallmart.Inc Balance Sheet
Explanation
The formula for breakeven sales can be derived by using the following steps:
Step 1: Firstly, determine the variable costs of production of the subject company. Typically, variable costs include those types of costs that directly vary with the change production level or sales volume. Examples of variable costs are the cost of raw material, fuel expense, direct labor cost, etc.
Step 2: Next, determine the fixed costs of production, which include those type of costs which are periodic in nature and as such do not change with the change in the level of production. Examples of fixed costs are management salaries, depreciation expense, interest expense, taxes, rental expense, etc.
Step 3: Next, determine the total sales of the company during a specific period of time, halfyearly or annually, etc.
Step 4: Next, calculate the contribution margin percentage by dividing the difference between the sales (step 3) and the variable costs (step 1) by the sales. It is expressed in terms of percentage.
Contribution Margin Percentage = (Sales – Variable Costs) / Sales * 100%
Step 5: Finally, the formula for breakeven sales can be derived by dividing the fixed costs (step 2) of a company by the contribution margin percentage (step 4) as shown below,
BreakEven Sales = Fixed Costs / Contribution Margin Percentage
or
BreakEven Sales = Fixed Costs * Sales / (Sales – Variable Costs)
Relevance and Use of BreakEven Sales Formula
It is very important to understand the concept of breakeven sales because it is predominantly used to ascertain the minimum sales required in order to achieve at least no profit no loss situation. It is usually used before the start of a new business or a new product line, so as to chalk out a clear plan and identify the key risks involved in achieving the desired profitability.
BreakEven Sales Formula Calculator
You can use the following BreakEven Sales Formula Calculator
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