One can determine the break-even point in sales dollars (instead of units) by dividing the company’s total fixed expenses by the contribution margin ratio.
The contribution margin ratio is the contribution margin divided by sales (revenues).
The ratio can be calculated using company totals or per unit amounts. We will compute the contribution margin ratio for the Oil Change Co. by using its per unit amounts:
Revenues or Sales per car $24
Variable Expenses per car – 9
Contribution Margin per car $15
Contribution Margin Ratio = Contribution Margin ÷ Revenues or Sales
Contribution Margin Ratio = $15 ÷ $24
Contribution Margin Ratio = 62.5%
The break-even point in sales dollars for Oil Change Co. is
Break-even Point in Sales $ = Total Fixed Expenses ÷ Contribution Margin Ratio
Break-even Point in Sales $ = $2,400 per week ÷ 62.5%
Break-even Point in Sales $ = $3,840 per week
The break-even point of $3,840 of sales per week can be verified by referring back to the break-even point in units. Recall there were 160 units necessary to break-even. At $24 per unit the necessary sales in dollars would be $3,840.
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