ENTR 297-02

Break Even Sales Point Practice Problems

First, know and memorize the formula:

Break Even Sales Point = Fixed Costs/Contribution Margin.

What is the “Contribution Margin”? It’s the % of each $ of sales that is left over to cover fixed costs. It’s
the portion of each $ of sales that “contributes” to fixed costs (and after that profit). It’s the
Contribution Margin, since it contributes to covering fixed costs.

How do you calculate Contribution Margin? It’s 1 minus all Variable Expenses/Sales.

The fraction all Variable Expenses/Sales is the % of sales that cover all Variable Expenses. But for
Contribution Margin you need what’s left over after that. So that’s why it’s ONE MINUS all Variable
Expenses/Sales.

A simple Example: You buy soda for 50 cents and you sell it for $1.
• Your Variable Expenses are 50 cents of every $1 of sales.
• Variable Expenses/Sales are .50/1.00 = .50.
• Your Contribution Margin is 1 minus all Variable Expense/Sales or 1 minus .50 = .50.
• .50 is your Contribution Margin.
• But hopefully in our example, that’s intuitive. If you pay 50 cents for soda and sell it for $1, you
have 50 cents of every sale left over to cover fixed costs.

For simple examples like the soda one, all you need to know is what your inventory costs and what you
sell it for to calculate the contribution margin. 50 cents/$1 is .5.

For more complex examples you need to know Total Sales and all Variable Expenses. But it’s still the
same formula as .50 cents (cost of soda)/$1 Sale Price of Soda. The formula is:
Contribution Margin = all Variable Expenses/Sales

Problem #1

You are selling chips and soda at the Lindberg Park snack shop during the summer. The rent for the
snack shop is $100 a month. You will rent the snack shop for three months June, July and August. The
chips and soda cost 50 cents. You sell them for $1. What is your Breakeven Sales Point?

First, know and memorize our formula: Break Even Sales Point = Fixed Costs/Contribution Margin.
Contribution Margin = 1 minus all Variable Expenses/Total Sales.
Here its 1 minus (.50 costs/1 dollar sales = .50.). 1 minus .50 is .50. Contribution Margin is .50.
Break Even Sales Point = Fixed Costs/Contribution Margin.
Fixed Costs are your rent. $100 a month for 3 months = $300.

Break Even Sales Point = Fixed Costs/Contribution Margin.

Break Even Sales Point = $300/.50 = $600.

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Again hopefully this is intuitive. If 50 cents or ½ your sales go to cover the cost of chips and soda, and
your rent is $300, you need TWICE that amount in sales to cover the costs of your chips and soda and
rent.

Problem #2.

You sell Iphone cases at a kiosk at the mall for the summer. You buy the cases for $10 and sell them for
$20. Your rent for the kiosk is $200 a month and you rent the kiosk for three months.

What is your Break Even Sales Point?

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Remember and memorize our formula:
Break Even Sales Point = Fixed Costs/Contribution Margin (where contribution margin is ONE MINUS all
Variable Expenses/Total Sales).
So Contribution Margin is 1 – (.50/1.00) = 1 - .50 = .50

Break Even Sales Point is Fixed Costs/.50

Fixed Costs are $600 ($200 x 3)
Break Even Sales Point = $600/.50 = $1200.
Again, based on the examples you may have intuited this and not even have had to do the math other
than in your head.

Problem #3.
Let’s take a more complicated example. It all works the same. The formula is the same. You just have
more specific items to add together.

Two Bici Bicycle Shop

Income Statement
Sales $96,000
Cost of Goods Sold 46,240
Gross Profit $49,760
Fixed Expenses
Rent $2,400
Insurance 3,000
Salaries 16,500
Taxes 1,200
Other Fixed Expenses 900
Total Fixed Expenses $24,000

Variable Expenses
Commissions $10,460
Advertising 6,580
Credit Card Fees 2,800
Other Variable Expenses 1,120
Total Variable Expenses $20,960

Profit $4,800

Take a deep breath and don’t freak out. You can do this.
Remember and memorize our formula:
Break Even Sales Point = Fixed Costs/Contribution Margin
Contribution Margin is 1 – (all Variable Expense/Total Sales)

Ok Let’s rock!!!
Well the first good news is that Fixed Costs is right there for us to see. When you see “Fixed Expenses”
that’s the same thing as Fixed Costs. Costs and Expenses mean the same thing. So I can see that Fixed
Costs are $24,000. Piece of cake.

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Now I need to find the Contribution Margin. Unfortunately there is nothing up there that says
“Contribution Margin” so I have to do some work.
Contribution Margin = 1 Minus (all Variable Expenses/Total Sales). I do see “Sales” are $96,000. So
that’s Total Sales. I see Total Variable Expenses is $20,900. But is that “all” Variable Expense?
(Ahhh Prof. Irvin you are tricking us!! Shame on you!!!)
Remember our chips and Iphone cases? We had to pay for them and that cost was a variable expense.
So you see on the Income Statement above “Cost of Good Sold.” That’s EXACTLY what is says. It’s how
much you had to pay for the stuff you’re selling. That’s a Variable Expense. So there is just one more
step to calculating “all” Variable Expenses. It’s “Total Variable Expenses” from the Income Statement
PLUS “Cost of Goods Sold”.
So all Variable Expenses = Cost of Goods Sold + Total Variable Expenses = 46,240 + 20,960 = 67,200.

Whew. Geez, I’ve lost my place. What are we doing and why?

We are calculating Break Even Sales Point, a complicated example. We’re almost there.
Remember and memorize our formula:
Break Even Sales Point = Fixed Costs/Contribution Margin or
Break Even Sales Point = Fixed Costs/(1 – all Variable Expenses/Sales)
The formula (1-all Variable Expenses/Sales) is the same thing as Contribution Margin

So Break Even Sales Point Equals

$24,000 (Fixed Costs)/Contribution Margin
Contribution Margin is 1 – all Variable Expenses/Sales
Contribution Margin is 1- $67,200 (all Variable Expenses)/96,000 (Sales)
Contribution Margin is 1- 67,200/96,000 or 1 - .7
Contribution Margin is 1- .7 = .3

Break Even Sales Point Equals Fixed Costs/Contribution Margin

Break Even Sales Point Equals $24,000/.3 = $80,000

You did it!! (or at least I hope you did).

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Problem #4. Complicated Example. You’re on your own. Go for it.

Sheila’s Donut Shop

Income Statement
Sales $84,000
Cost of Goods Sold 20,000
Gross Profit $64,000
Fixed Expenses
Rent $4,000
Insurance 1,500
Salaries 12,000
Other Fixed Expenses 1,000
Total Fixed Expenses $18,500

Variable Expenses
Advertising 11,000
Credit Card Fees 3,360
Other Variable Expenses 500
Total Variable Expenses $14,860

Profit $30,640

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Break Even Sales Point = Fixed Costs/Contribution Margin
Contribution Margin is 1 – all Variable Expenses/Sales
Break Even Sales Point = Fixed Costs/(1- all Variable Expenses/Sales)

All Variable Expense = Cost of Goods Sold + Variable Expenses

All Variable Expenses = 20,000 + 14,860 = 34,860
All Variable Expenses/Sales = 34,860/84,000 = .415
Contribution Margin = 1 - .415 = .585

Break Even Sales Point = Fixed Costs (18,500)/Contribution Margin (.585) = 31,623.93