###### Short-term Funding Choices for a Company

The objectives of a short-term borrowing strategy include the following: Ensuring that there... **Read More**

The breakeven quantity of sales, or simply breakeven point, indicates the number of units of a company’s product that is produced and sold. At this point, a 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 that the figures below represent a company’s product costs.

$$ \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 calculated using the following formula:

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