Calculating Break-Even Point

The break-even point (BEP) is the point at which a business's total revenue equals its total costs. To calculate the BEP, you need to know the fixed costs, variable costs, and the price of the product or service.

Formula

To calculate your break-even point in sales dollars, use the following formula: Break-Even Point (sales dollars) = Fixes Costs ÷ Contribution Margin.

Contribution Margin = Price of Product – Variable Costs To get a better sense of what this all means, let’s take a more detailed look at the formula components.

Steps

Determine the price of the product or service
Calculate the contribution per unit by subtracting the variable cost from the price
Divide the fixed costs by the contribution per unit

Explanation

The BEP is the number of products or services that need to be sold to cover all costs and make a profit.

Benefits

Break-even analysis can help businesses determine the best price for their products or services
It can help businesses understand how much of a product or service they can sell to make a profit

Example

Understanding Break-Even Point Calculation

The Break-Even Point (BEP) is the point at which total revenues equal total costs, resulting in neither profit nor loss. This calculation helps businesses determine the minimum sales they need to avoid a loss and understand the financial health of a business.

The key concepts of break-even analysis include:

Fixed Costs: Costs that do not change with the level of production or sales, such as rent and salaries.
Variable Costs: Costs that vary with the level of production or sales, such as raw materials and labor costs.
Sales Price: The price at which a product or service is sold to customers.
Break-Even Point: The level of sales at which total revenues equal total costs, resulting in no profit or loss.

Calculating the Break-Even Point

To calculate the break-even point, the following steps are typically taken:

Determine the fixed costs of the business.
Calculate the variable cost per unit of product or service.
Establish the sales price per unit.
Apply the break-even formula: Break-Even Point (Units) = Fixed Costs / (Sales Price per Unit - Variable Cost per Unit).

Example: If a business has fixed costs of $10,000, a sales price of $50 per unit, and a variable cost of $30 per unit, the break-even point would be calculated as follows: Break-Even Point = 10,000 / (50 - 30) = 500 units.

Factors Affecting Break-Even Point

Several factors influence the break-even point:

Fixed Costs: The higher the fixed costs, the higher the sales needed to cover them.
Variable Costs: Higher variable costs increase the break-even point since each unit contributes less to covering fixed costs.
Sales Price: A higher sales price per unit reduces the break-even point as each unit sold contributes more to covering fixed costs.

Types of Break-Even Analysis

Break-even analysis can vary based on the business and industry:

Traditional Break-Even Analysis: A straightforward calculation using fixed costs, variable costs, and sales price.
Target Profit Break-Even Analysis: A calculation where the break-even point is adjusted to include a desired profit amount.
Multi-Product Break-Even Analysis: A calculation that accounts for multiple products or services, each with different prices and cost structures.

Example: A business selling multiple products would need to calculate the weighted average contribution margin for all products when performing a multi-product break-even analysis.

Real-life Applications of Break-Even Point

Break-even analysis is widely used in the following scenarios:

Helping businesses determine the minimum sales required to avoid a loss.
Providing valuable insights for pricing strategies and cost management.
Assisting in investment decisions and determining the financial viability of new products or services.

Common Operations in Break-Even Point Calculation

When calculating the break-even point, the following operations are common:

Determining fixed costs and variable costs.
Calculating the sales price per unit.
Applying the break-even formula to calculate the required sales volume to cover costs.

Break-Even Point Calculation Examples Table
Calculation Type	Description	Steps to Calculate	Example
Calculating Break-Even Point (Units)	Determining the number of units that need to be sold to cover all fixed costs.	Identify the fixed costs of the business. Determine the variable cost per unit and the sales price per unit. Apply the break-even formula: Break-Even Point (Units) = Fixed Costs / (Sales Price per Unit - Variable Cost per Unit).	A business with $10,000 in fixed costs, a sales price of $50 per unit, and a variable cost of $30 per unit would have a break-even point of 500 units.
Target Profit Break-Even	Calculating the number of units needed to cover fixed costs and achieve a desired profit.	Identify fixed costs and the target profit. Determine the variable cost per unit and sales price per unit. Apply the formula: Break-Even Point (Units) = (Fixed Costs + Target Profit) / (Sales Price per Unit - Variable Cost per Unit).	If a business wants to earn a target profit of $5,000, the break-even point with the previous data would be: Break-Even Point = (10,000 + 5,000) / (50 - 30) = 750 units.
Multi-Product Break-Even	Calculating the break-even point for a business selling multiple products with different prices and costs.	Identify the fixed costs for the business. Determine the sales price and variable cost per unit for each product. Calculate the weighted average contribution margin. Apply the formula: Break-Even Point (Units) = Fixed Costs / Weighted Average Contribution Margin.	If a business sells two products with different prices and variable costs, the break-even point calculation will use the weighted average contribution margin for both products.
Break-Even Point (Revenue)	Determining the amount of revenue needed to cover all fixed and variable costs.	Identify the fixed costs and the contribution margin (sales price minus variable cost). Apply the formula: Break-Even Revenue = Fixed Costs / Contribution Margin Ratio.	A business with $10,000 in fixed costs and a contribution margin ratio of 0.4 would need $25,000 in revenue to break even: Break-Even Revenue = 10,000 / 0.4 = $25,000.