Principles of Accounting · Cost and management accounting

Calculating contribution and break-even point

You memorised the break-even formula but do not know which cost goes where.

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Contribution per unit is selling price minus variable cost per unit. The break-even point is fixed costs divided by that contribution, and it tells you how many units must be sold before any profit appears.

This lesson is part of SPM Accounting cost and management accounting. You need to classify costs first, as in fixed, variable, direct and indirect costs.

How do I calculate break-even?

Follow these steps in order, using the labels from the cost table:

Add the variable costs per unit.
Contribution per unit = selling price − variable cost per unit.
Break-even units = total fixed costs ÷ contribution per unit.
Break-even sales in RM = break-even units × selling price.

Worked example: a cake stall

An invented stall sells cakes at RM25 each. Ingredients and a box use up RM15 of that. Rent and salary add up to RM4 500 for the month.

Contribution per unit = 25 − 15 = RM10.

Break-even units = 4 500 ÷ 10 = 450 cakes. Break-even sales = 450 × 25 = RM11 250.

Suppose the stall sells 600 cakes. Margin of safety = 600 − 450 = 150 cakes, or 150 × 25 = RM3 750 in sales. Check the profit: 600 × 10 − 4 500 = RM1 500, and 150 × 10 = RM1 500, so the figures agree.

The mistake that divides by the wrong number

A common slip is dividing fixed costs by the selling price: 4 500 ÷ 25 = 180 cakes. That answer is much too low.

Each cake sold at RM25 must first pay RM15 of ingredients, so only RM10 is left to cover fixed costs. Check by testing the answer: 180 cakes give a contribution of 1 800, which does not cover RM4 500.

Check yourself

Each unit sells for RM40 and uses RM28 of variable items, and the fixed items total RM6 000. Find the break-even units and sales, then the units needed for a target profit of RM3 000.

Answer

Contribution = 40 − 28 = RM12.

Break-even units = 6 000 ÷ 12 = 500 units. Break-even sales = 500 × 40 = RM20 000.

Target profit units = (6 000 + 3 000) ÷ 12 = 9 000 ÷ 12 = 750 units.

What to study next

Move on to interpreting cost-volume-profit scenarios to see how the answer shifts when price or cost changes. A cash view comes in preparing a simple cash budget.

If you want a teacher to check your contribution and break-even working on your own questions, see online one-to-one Accounting tuition.

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Common questions

What is contribution per unit?

It is the selling price minus the variable cost per unit. Each unit sold adds this amount towards covering fixed costs and, after break-even, towards profit.

Why do we divide fixed costs by contribution and not by selling price?

Only the contribution is left after variable costs are paid, so only that amount helps cover fixed costs. Dividing by selling price assumes each sale helps more than it really does.

How do I find break-even in ringgit?

Multiply the break-even units by the selling price per unit. Or divide fixed costs by the contribution per ringgit of sales, which gives the same result.

What is the margin of safety?

It is actual or expected sales minus break-even sales. It shows how far sales can fall before the business starts making a loss.

Keep going

If break-even answers come out a little off, one-to-one Accounting lessons let a teacher trace your working and find whether the slip is in contribution, fixed costs or rounding.

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