Costs & Break-even: key terms, formulas and examples
Fixed costs stay constant, variable costs move with output, and break-even is where revenue covers both. Direct costs tie to a product, overhead does not.
Example
Fixed 6,000, price 20, variable cost 8: break-even is 6,000 ÷ 12 = 500 units.
Takeaway
Lower break-even by cutting fixed costs or raising unit margin.
Key terms
- Fixed costs
- Costs that stay the same however much you sell.
- Variable costs
- Costs that rise and fall with output.
- Cost of goods sold
- Direct cost of making what you sold.
- Overhead
- Ongoing costs not tied to a specific product.
- Depreciation
- Spreading an asset's cost over its useful life.
- Direct costs
- Costs tied directly to making a specific product.
Formulas
Break-even unitsF ÷ (P − V)
Break-even revenueF ÷ CM ratio
Contribution margin ratio(P − V) ÷ P × 100
Margin of safety(Sales − BE) ÷ Sales × 100
Operating leverageCM ÷ OI
Target profit units(F + T) ÷ (P − V)
Contribution margin ratio(P − V) ÷ P × 100
Profit per unitP − V − F ÷ Q
Marginal costΔTC ÷ ΔQ
Average total costTC ÷ Q
Average unit costC ÷ U
Total costF + V × Units
Straight-line depreciation(Cost − Salvage) ÷ Life
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