Contribution and Break-Even Point (BEP)

Written by True Tamplin, BSc, CEPF®

Reviewed by Subject Matter Experts

Updated on March 30, 2023


The term contribution refers to the excess of selling price over a product's variable cost. Thus, contribution is the difference between the sale price and variable cost. In other words:

Contribution (C) = Sales - Variable cost (or Fixed cost) + Profit


Suppose that sales are $80,000, variable cost is $40,000, and fixed cost amounts to $30,000. Using this information to calculate contribution, it follows that:

Contribution = Sales - Variable cost

= $80,000 - $40,000

= $40,000

Usefulness of Contribution

Contribution is useful for a company's management in the following ways:

1. When calculating BEP: At the break-even point (BEP), sales values and total costs are equal. Excess output over BEP output will result in profit.

2. Provides information about desired profit: Profit happens when the contribution exceeds the fixed costs. The amount of profit that a company aims to earn depends on its cost of capital.

The BEP is a no-profit no-loss area, where the desired profit is represented as an addition over the BEP.

To calculate profit based on contribution and fixed costs, the formula is:

Profit = Contribution - Fixed costs

3. Selection of best alternative: The concept of contribution helps to evaluate alternative proposals (e.g., whether to change the sales mix or enter an overseas market).

Break-Even Point (BEP)

The break-even point, or BEP, is the point at which the cost incurred and the revenues generated are equal. It is also known as zero-point costs. Excess output and sales over BEP is an indicator of profit.

The formula for BEP is as follows:

BEP sales = Fixed expenses + Variable costs

BEP in units: Fixed expenses $80,000 sale price per unit $20, variable cost $15. Thus BEP (Units)

BEP= Fixed expenses / C

= 80,000 / 5

= 16,000 units


Sales value = 16,000 units x 20 $320,000
Variable cost = 16,000 x 15 240,000
Fixed cost 80,000
Total cost 320,000
(0) Zero

BEP (Sales) = BEP units x Per unit sale

= 16,000 x 20

= $320,000

Usefulness of Break-Even Point (BEP)

The break-even point (BEP) is used in the following main ways:

1. Knowledge of profitability: The BEP offers information about the profitability of specific products.

2. Helpful in changing sales price: The BEP is useful in changing sales price and its effects on business.

3. Desired profit: The BEP is useful in knowing the amount of desired profits.

4. Useful for expansion: The BEP is helpful in learning about the expansion possibilities of the business.

5. Useful for knowledge about profit or loss on different levels of output: BEP provides clear data about profit and loss. When sales exceed the BEP, profit is possible; when sales are lower than the BEP sales, losses are probable.

Contribution and Break-Even Point (BEP) FAQs

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.