How to Calculate Your Break-Even Point

Discover our Bachelor of Science in Management to prepare you for a solid entry into the world of work. Every business faces a critical threshold in its operations—the point at which sales revenue precisely covers all expenses. This pivotal moment, known as the break-even point, separates a time of financial losses from profitability.

Break-Even Analysis by Gross Margin

The breakeven point is an important financial indicator that helps businesses understand their minimum viability threshold. Whether in manufacturing, retail, service industries, or investment contexts, knowing exactly where revenue meets expenses provides a critical perspective for decision-making. In cases where the production line falters, or a part of the assembly line breaks down, the break-even point increases since the target number of units is not produced within the desired time frame. Equipment failures also mean higher operational costs and, therefore, a higher break-even. Independent professionals can use a break-even analysis to set appropriate rates for their services, ensuring they cover expenses while maintaining profitability. New businesses can benefit from a break-even analysis to determine whether their business model is financially viable.

What the break-even formula tells you

Any number of free online break-even point calculators can help, like this calculator by the National Association for the Self-Employed. Because those aren’t static analyses, they give business owners more than a snapshot of the present, but also a forecast of the future. If you need a more extensive assessment of your business health, Ryze recommends sensitive analysis and scenario planning as alternatives for the break-even formula. My Accounting Course  is a world-class educational resource developed by experts to simplify accounting, finance, & investment analysis topics, so students and professionals can learn and propel their careers. Shaun Conrad is a Certified Public Accountant and CPA exam expert with a passion for teaching. After almost a decade of experience in public accounting, he created MyAccountingCourse.com to help people learn accounting & finance, pass the CPA exam, and start their career.

What is Break-Even Analysis?

The total variable costs will therefore be equal to the variable cost per unit of what info does my accountant need to file business taxes $10.00 multiplied by the number of units sold. As the owner of a small business, you can see that any decision you make about pricing your product, the costs you incur in your business, and sales volume are interrelated. Calculating the breakeven point is just one component of cost-volume-profit analysis, but it’s often an essential first step in establishing a sales price point that ensures a profit. What this answer means is that XYZ Corporation has to produce and sell 50,000 widgets to cover their total expenses, fixed and variable. At this level of sales, they will make no profit but will just break even.

The number of units that must be sold to cover total costs, ensuring neither profit nor loss. Variable costs, on the other hand, are directly linked to the company’s level of production or sales. They include, for example, raw materials, variable labor and transport costs. Fixed costs are those expenses that do not vary according to the company’s level of activity.

Calculating Contribution Margin and BEPs

For instance, a break-even analysis might reveal that raising the price of a product by $2 could lead to a 10% reduction in sales, but still cover fixed costs. Understanding how small price changes affect profitability is essential for manufacturers looking to optimize margins and sustain growth. Let’s take a look at a few of them as well as an example of how to calculate break-even point. Break-even analysis assumes that the fixed and variable costs remain constant over time. However, costs may change due to factors such as inflation, changes in technology, and changes in market conditions.

The Power of a 1% Price Change

Break-even is the point at which revenue and total costs are the same, meaning the business is making neither a profit nor a loss. The break-even level of output informs a business of how many products it needs to sell to reach the break-even point (BEP). Using break-even allows a business to understand its costs, revenue and potential profit to help inform business decisions. Enter fixed and variable costs into their respective sections to get a clear breakdown of expenses. Ensuring precise input helps in minimizing errors and obtaining a reliable analysis. The sum of all variable costs per unit, changes in working capital calculated to assess profitability per unit sold.

After months, if not years of investment, you want your business to sustain itself with its own money. An unprofitable business eventually runs out of cash on hand, and its operations can no longer be sustained (e.g., compensating employees, purchasing inventory, paying office rent on time). From this analysis, you can see that if you can reduce the cost variables, you can lower your breakeven point without having to raise your price. In accounting, the margin of safety is the difference between actual sales and break-even sales.

In this guide, we explain how to perform a break-even analysis and how it can enhance your pricing strategy while boosting margins. You understand the elements of the formula, know your numbers, and calculate your break-even point. However, you are quite a few steps closer to your goal, and here is why. In conclusion, just like the output for the goal seek approach in Excel, the implied units needed to be sold for the company to break even come out to 5k. The incremental revenue beyond the break-even point (BEP) contributes toward the accumulation of more profits for the company.

How to Calculate Break-Even Point (BEP)

• Knowing the break-even point allows businesses to set realistic sales targets and revenue goals.
• It is based on the concept of contribution margin, which represents the difference between a product’s selling price and its variable cost.
• After entering the end result being solved for (i.e., the net profit of zero), the tool determines the value of the variable (i.e., the number of units that must be sold) that makes the equation true.
• He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses.
• Understanding and calculating this threshold is fundamental for managers and entrepreneurs.
• In other words, a variable expense increases when an activity increases, and it decreases when the activity decreases.

An expense is variable when its total amount changes in proportion to the change in sales, production, or some other activity. In other words, a variable expense increases when an activity increases, and it decreases when the activity decreases. The break-even point of Makeup Company X is 250, meaning that the company must sell 250 units of their products to cover the business expenses and not lose money.

• This will give us the total dollar amount in sales that will we need to achieve in order to have zero loss and zero profit.
• Break-even analysis compares income from sales to the fixed costs of doing business.
• Discover our Bachelor of Science in Management to prepare you for a solid entry into the world of work.
• Note that the total fixed costs aren’t per product but rather the sum total of your business expenses over any given time period, whether that’s a month, quarter, or year (you choose!).
• Another very important aspect that needs to address is whether the products under consideration will be successful in the market.
• Also, it will give you clarity in terms of goals, allow you to make short-term and long-term predictions, and ensure your decision-making stays rational rather than emotional.

The Breakeven Point

It’s also important to keep in mind that all of these models reflect non-cash expense like average collection period formula how it works example depreciation. A more advanced break-even analysis calculator would subtract out non-cash expenses from the fixed costs to compute the break-even point cash flow level. Next, Barbara can translate the number of units into total sales dollars by multiplying the 2,500 units by the total sales price for each unit of $500. In the case of our fictional company, Happy Mugs, what if they decide to create a limited-edition product or run a special sale during the holidays? They can calculate the break-even point for those unique situations, but how do they fit within their yearly financial strategy?

The break-even point formula can determine the BEP in product units or sales dollars. On the other hand, if the company struggles to reach this threshold, it may be a warning signal that costs are too high, selling prices too low, or sales volumes too low. It’s also useful to distinguish between the short- and long-term implications of the break-even point. In the short term, breaking even is essential to ensure the company’s immediate survival. Pricing power is a company’s ability to set and maintain prices without losing customers to competitors. However, knowing how much flexibility a business truly has requires careful analysis.