equation method

Dictionary of Accounting Terms for: equation method
equation method

method used to find the break-even point or target income volume in Cost-Volume-Profit (CVP) Analysisor break-even analysis. The equation is:

Sales = Variable Costs + Fixed Costs + Net Income

Let p = unit selling price, x = volume, v = unit variable cost, and FC = total fixed costs; the equation becomes

px =vx +FC+Net Income

At the break-even volume, px = vx + FC + 0. To find the break-even point in units, simply solve the equation for x. Assume p= $250, v = $150, andFC = $35,000. Then the equation is:

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250x = $150x + $35,000 + 0
$100x = $35,000
x = 350 units