Break-Even Analysis: Formula and Calculation

When sales exceed the break-even point the unit contribution margin from the additional units will go toward profit. The contribution margin represents the revenue required to cover a business‘ fixed costs and contribute to its profit. With the contribution margin calculation, a business can determine the break-even point and where it can begin earning a profit.

Benefits of a Breakeven Analysis

The break-even point (BEP) is the amount of product or service sales a business needs to make to begin earning more than you spend. You measure the break-even point in units of product or sales of services. Break-even analysis looks at fixed costs relative to the profit earned by each additional unit produced and sold. According to this formula, your break-even point will be $200,000 in sales revenue.

The Break-even point is calculated by dividing the fixed costs by the sales price per unit minus the variable cost per unit. If the company can increase its contribution margin per unit to $8 (by perhaps lowering its per unit variable cost), it only needs to sell 8,750 ($70,000 / $8) to break even. Note that in either scenario, the break-even point is the same in dollars and units, regardless of approach.

The profit is $190 minus the $175 breakeven price, or $15 per share. At that breakeven price, the homeowner would exactly break even, neither making nor losing any money. For the example of Maggie’s Mugs, she paid $5 per mug and $10 for them to be painted. If she keeps falling short of the 500 units needed to break even, she could potentially find a cheaper mug supplier or painters who are willing to take a lesser payment. By reducing her variable costs, Maggie would reduce the break-even point and she wouldn’t need to sell so many units to break even. You can use the break-even point to find the number of sales you need to make to completely cover your expenses and start making profit.

How to Calculate Break Even Point (Units and Sales Dollars)

Break-even analysis involves a calculation of the break-even point (BEP). The break-even point formula divides the total fixed production costs by the price per individual unit less the variable cost per unit. If you are a small business owner or have just started your own business, doing a break-even analysis is important. It will help you determine if your business is sustainable or not, if the costs are too high or if the princess is too low to reach the break-even point at the right time. It will help you forecast your business’s profitability, revenue and growth. Consider the following example in which an investor pays a $10 premium for a stock call option, and the strike price is $100.

The breakeven point can also be used in other ways across finance such as in trading. This calculation demonstrates that Hicks would need to sell 725 units at $100 a unit to generate $72,500 in sales to earn $24,000 in after-tax profits. As you can see, when Hicks sells 225 Blue Jay Model birdbaths, they will make no profit, but will not suffer a loss because all of their fixed expenses are covered. What this tells us is that Hicks must sell 225 Blue Jay Model birdbaths in order to cover their fixed expenses. In other words, they will not begin to show a profit until they sell the 226th unit.

What is a Break-Even Point and How to Calculate

An IT service contract is typically employee cost intensive and requires an estimate of at least 120 days of employee costs before a payment will be received for the costs incurred. Having high fixed costs puts a lot of pressure on a business to make up those expenses with sales revenue. If you find yourself falling short of your break-even point month over month and feel like you can’t change your prices, lowering your fixed costs can be a solution. If your sales price is too low, you might have to sell too many units to break even. And as much as we think a lower price means more buyers, studies actually show that consumers rely on price to determine the quality of a product or service.

If you find yourself asking these questions, it’s time to perform break-even analysis. Read on to learn all about how break-even analysis can serve your small business. Let’s show a couple of examples of how to calculate the break-even point. Sales Price per Unit- This is how much a company is going to charge consumers for just one of the products that the calculation is being done for. Let’s take an example to understand better the break-even point formula and how to calculate it.

Mitigate financial risks

1. Break-even analysis ignores external factors such as competition, market demand, and changes in consumer preferences.
2. Break-even analysis looks at fixed costs relative to the profit earned by each additional unit produced and sold.
3. To do this, calculate the contribution margin, which is the sale price of the product less variable costs.
4. Break-even analysis, or the comparison of sales to fixed costs, is a tool used by businesses and stock and option traders.
5. One major downside is its reliance on the assumption that costs can be neatly divided into fixed and variable categories.

Thus, you can always find the break-even point (or a desired profit) in units and then convert it to sales by multiplying by the selling price per unit. Alternatively, you can find the break-even point in sales dollars and then find the number of units by dividing by the selling price per unit. Your variable costs (or variable expenses) are the expenses that do change with your sales volume.

How to Calculate Break-Even Points?

In other words, your company is neither making money nor losing it. He is considering introducing a new soft drink, called Sam’s Silly Soda. He wants to know what kind of impact this new drink programmable brick utilities will have on the company’s finances. So, he decides to calculate the break-even point, so that he and his management team can determine whether this new product will be worth the investment.

Each loft is sold for $500, and the cost to produce one loft is $300, including all parts and labor. As you can see, the $38,400 in revenue will not only cover the $14,000 in fixed costs, but will supply Marshall & Hirito with the $10,000 in profit (net income) they desire. If your price is too high, you might be falling short of your break-even point because customers won’t buy at that price. Lowering your selling price will increase the sales needed to break even. But this can be offset by the increased volume of purchases from new customers.

For example, if a product sells for $10 but only incurs $3 of variable costs per unit, the product has a advances to employees contribution margin of $7. Note that a product’s contribution margin may change (i.e. it may become more or less efficient to manufacture additional goods). Another limitation is that the breakeven point assumes that sales prices, variable costs per unit, and total fixed costs remain constant, which is often not the case.

The break-even point allows a company to know when it, or one of its products, will start to be profitable. If a business’s revenue is below the break-even point, then the company is operating at a loss. For an Entrepreneur, a break-even point is a great tool to know if your business or new product will be worth the investment or not.

If you’re looking for other small business tips and accounting tools, we’re here to help. QuickBooks can assist with tasks from bookkeeping and payroll to inventory analysis and profitability. Contact us today to discover what QuickBooks can do to help you with all of your small business accounting needs. When analyzing your break-even point, not only do you want to see that your business is breaking even, you’re looking to make sure your business is profitable as well. Here are a few ways to lower your break-even point and increase your profit margin. Variable Costs per Unit- Variable costs are costs directly tied to the production of a product, like labor hired to make that product, or materials used.