Dictionary of Accounting Terms: 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:
| 250x | = | $150x + $35,000 + 0 |
| $100x | = | $35,000 |
| x | = | 350 units |
