## How to Calculate a Breakeven Point

Once you reach this point, you’re usually ready to scale toward profitability—and that’s exciting. It’s the tipping point where you’re no longer losing money, but are not yet making a profit. This team of experts helps Finance Strategists maintain the highest level of accuracy and professionalism possible. At Finance Strategists, we partner with financial experts to ensure the accuracy of our financial content. The articles and research support materials available on this site are educational and are not intended to be investment or tax advice.

## 2 Calculate a Break-Even Point in Units and Dollars

For instance, if a new competitor launches its products, then it can affect your break-even point. The accuracy of data used in the break even point formula dictates whether you can trust the results or not. This can not always be the case because of the constantly changing costs. Determining the number of units that need to be sold to achieve the break-even point is one of the most common methods of break-even analysis. This means Sam’s team needs to sell $2727 worth of Sam’s Silly Soda in that month, to break even. Contribution Margin is the difference between the price of a product and what it costs to make that product.

## Break Even Analysis

Barbara is the managerial accountant in charge of a large furniture factory’s production lines and supply chains. The basic objective of break-even point analysis is to ascertain the number of units of products that must be sold for the company to operate without loss. In other words, the no-profit-no-loss point is the break-even point. A breakeven point tells you what price level, https://www.business-accounting.net/ yield, profit, or other metric must be achieved not to lose any money—or to make back an initial investment on a trade or project. Thus, if a project costs $1 million to undertake, it would need to generate $1 million in net profits before it breaks even. Consider the following example in which an investor pays a $10 premium for a stock call option, and the strike price is $100.

## Break Even Calculator

Let’s take a look at a few of them as well as an example of how to calculate break-even point. The total variable costs will therefore be equal to the variable cost per unit of $10.00 multiplied by the number of units sold. Therefore, given the fixed costs, variable costs, and selling price of the water bottles, Company A would need to sell 10,000 units of water bottles to break even. Traders also use BEPs to analyze trades, determining the precise price at which a security must close to pay all trade-related expenses, such as commissions, taxes, management fees, and other charges.

## Formula for Break-Even Analysis

- Fixed costs are expenses that remain the same, regardless of how many sales you make.
- For each additional unit sold, the loss typically is lessened until it reaches the break-even point.
- Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance.
- Having high fixed costs puts a lot of pressure on a business to make up those expenses with sales revenue.
- He calculates the fixed costs and variable costs which amount to $1,000 for one month and $0.10 per pen manufactured respectively.

To find the total units required to break even, divide the total fixed costs by the unit contribution margin. With a contribution margin of $40 above, the break-even point is 500 units ($20,000 divided by $40). Upon selling 500 units, the payment of all fixed costs is complete, and the company will report a net profit or loss of $0. It is also possible to calculate how many units need to be sold to cover the fixed costs, which will result in the company breaking even.

## Break-even example for a product-based business

The information required to calculate a business’s BEP can be found in its financial statements. The first pieces of information required are the fixed costs and the gross margin percentage. A. If they produce nothing, they will still incur fixed costs of $100,000. Again, looking at the graph for break-even (Figure 3.8), you will see that their sales have moved them beyond the point where total revenue is equal to total cost and into the profit area of the graph. Ethical managers need an estimate of a product or service’s cost and related revenue streams to evaluate the chance of reaching the break-even point. Now is the time to assess the viability of your present plan and determine whether you require to increase prices, find a means to reduce expenses, or do both.

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 understand loan options or service. Fixed costs (like office space, server maintenance, and employee salaries) total $15,000 per month, and the variable costs per subscription (customer support and software updates) come out to $10 per unit.

If you have any other costs tied to the products you sell—like payments to a contractor to complete a job—add them to your cost of goods sold to find your total variable costs. The break-even point is the volume of activity at which a company’s total revenue equals the sum of all variable and fixed costs. The break-even point is the point at which there is no profit or loss. To demonstrate the combination of both a profit and the after-tax effects and subsequent calculations, let’s return to the Hicks Manufacturing example. Let’s assume that we want to calculate the target volume in units and revenue that Hicks must sell to generate an after-tax return of $24,000, assuming the same fixed costs of $18,000. However, using the contribution margin per unit is not the only way to determine a break-even point.

In effect, the insights derived from performing break-even analysis enables a company’s management team to set more concrete sales goals since a specific number to target was determined. If the stock is trading at a market price of $170, for example, the trader has a profit of $6 (breakeven of $176 minus the current market price of $170). When there is an increase in customer sales, it means that there is higher demand. A company then needs to produce more of its products to meet this new demand which, in turn, raises the break-even point in order to cover the extra expenses. Break-even analysis is often a component of sensitivity analysis and scenario analysis performed in financial modeling.

As you’ve learned, break-even can be calculated using either contribution margin per unit or the contribution margin ratio. Now that you have seen this process, let’s look at an example of these two concepts presented together to illustrate how either method will provide the same financial results. 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. Since we earlier determined $24,000 after-tax equals $40,000 before-tax if the tax rate is 40%, we simply use the break-even at a desired profit formula to determine the target sales. For each additional unit sold, the loss typically is lessened until it reaches the break-even point.

In Building Blocks of Managerial Accounting, you learned how to determine and recognize the fixed and variable components of costs, and now you have learned about contribution margin. For example, if a product sells for $200 each, and the total variable costs are $80 per unit, the contribution margin is $120 ($200 – $80). The $120 is the income earned after deducting variable costs and needs to be enough to cover the company’s fixed costs.

With this information, we can solve any piece of the puzzle algebraically. In contrast to fixed costs, variable costs increase (or decrease) based on the number of units sold. If customer demand and sales are higher for the company in a certain period, its variable costs will also move in the same direction and increase (and vice versa). Generally, to calculate the breakeven point in business, fixed costs are divided by the gross profit margin.

DigitalOcean provides straightforward, budget-friendly cloud solutions to lower your fixed and variable costs. Our products keep your overhead low and operations streamlined, allowing you to scale up or down to cut unnecessary costs and hit your break-even point quicker. You would not be able to calculate the break-even quantity of units unless you have revenue and variable cost per unit.

They can also change the variable costs for each unit by adding more automation to the production process. Lower variable costs equate to greater profits per unit and reduce the total number that must be produced. As you can imagine, the concept of the break-even point applies to every business endeavor—manufacturing, retail, and service.

For example, assume that in an extreme case the company has fixed costs of $20,000, a sales price of $400 per unit and variable costs of $250 per unit, and it sells no units. It would realize a loss of $20,000 (the fixed costs) since it recognized no revenue or variable costs. This loss explains why the company’s cost graph recognized costs (in this example, $20,000) even though there were no sales. If it subsequently sells units, the loss would be reduced by $150 (the contribution margin) for each unit sold. This relationship will be continued until we reach the break-even point, where total revenue equals total costs. Once we reach the break-even point for each unit sold the company will realize an increase in profits of $150.

If a business’s revenue is below the break-even point, then the company is operating at a loss. For example, if the economy is in a recession, your sales might drop. If sales drop, then you may risk not selling enough to meet your breakeven point. In the example of XYZ Corporation, you might not sell the 50,000 units necessary to break even. In computing for the BEP in dollars, contribution margin ratio is used instead of contribution margin per unit.

A business software solution like TallyPrime is a robust solution for businesses that care about storing data and making sense of it to make vital decisions. Check out these break-even calculation examples for product-based and service-based businesses. One calculates the value of sales (revenue) required to break even, while another calculates the number of sales (volume) required. A solution to this would be to use Net Operating Profit After Tax (NOPAT). By using NOPAT, you incorporate the cost of all actual operations, including the effect of taxes. For the rest of this section, we use the first formula to calculate the break-even point.

We use the formulas for number of units, revenue, margin, and markup in our break-even calculator which conveniently computes them for you. Where the contribution margin ratio is equal to the contribution margin divided by the revenue. Revenue per Unit is the amount of money that a company earns per unit sold. If the business operates above the break-even point, it makes profits. Break-even point refers to the level of activity or sales that will yield to zero profit. In other words, it is the level at which the business makes no gain or loss.