###### NPV as a Capital Budgeting Evaluation ...

Projects which have a positive NPV should, in theory, increase the value of... **Read More**

The breakeven quantity of sales or just simply breakeven point indicates the number of units of a company’s product that is produced and sold at which point the company’s net income becomes zero. Similarly, we can specify the breakeven point concerning operating profit. This is referred to as the “Operating breakeven point” or “Operating breakeven quantity of sales.”

At the operating breakeven quantity of sales, Revenues = Operating costs, so mathematically:

$$PQ_{OBE} = VQ_{OBE} + F $$

Where:

*P* = price per unit

*Q _{OBE}* = number of units produced and sold

*V* = variable cost per unit

*F* = fixed operating costs

Therefore, rearranging the formula, the operating breakeven quantity of sales,

$$ Q_{OBE}=\cfrac {F}{P-V} $$

In other words, a company’s operating breakeven quantity of sales is equal to the company’s fixed operating costs divided by the difference between the price per unit and variable cost per unit.

Assume a company’s product costs are represented by the figures below.

$$ \begin{array}{l|r}

\text{Price per unit sold} & {$8.00} \\ \hline

\text{Variable cost per unit} & {$4.00} \\ \hline

\text{Fixed cost per unit} & {$2,500.00} \\ \hline

\text{Fixed financing cost} & {$1,200.00} \\

\end{array} $$

What is the company’s operating breakeven quantity of sales?

**Solution**

The operating breakeven quantity of sales:

$$ Q_{OBE}=\cfrac {$2,500}{$8.00-$4.00}=625 \text{ units} $$

QuestionA company has fixed operating costs of $7,500. The price per unit for one of its products is $13.30, and the variable cost per unit is $7.50. The company’s operating breakeven quantity of sales is

closest to:A. 2,143.

B. 1,293.

C. 864.

SolutionThe correct answer is B.

The operating breakeven quantity of sales can be found using the following formula:

$$ Q_{OBE}=\cfrac {F}{P-V} =\cfrac {$7,500}{$13.30-$7.50}= 1,293 \text{ units} $$

*Reading 34 LOS 34e: *

*Calculate and interpret the operating breakeven quantity of sales*