Break-Even Point Formula & Analysis for Your Business
The selling price or sales per unit is the price at which you are selling each product to your customer. The total fixed costs, variable costs, unit or service sales are calculated on a monthly basis in this calculator. Meaning that adding the total for all products and services monthly should account for all products and services. You may also want to do the calculation individually for each product or service if the products or service sales vary per month.
- The total fixed costs are $50k, and the contribution margin ($) is the difference between the selling price per unit and the variable cost per unit.
- This is a great example of how selling a product for a higher price allows you to reach the break-even point significantly faster.
- Let’s go over how to calculate a break-even point using two different methods.
In general, a company with lower fixed costs will have a lower break-even point of sale. For example, a company with $0 of fixed costs will automatically have broken even upon the sale of the first product assuming variable costs do not exceed sales revenue. Production managers and executives have to be keenly aware of their level of sales and how close they are to covering fixed and variable costs at all times. That’s why they constantly try to change elements in the formulas reduce the number of units need to produce and increase profitability. 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 Point Formula (BEP)
Once you know the fixed and variable costs for the product your business produces or a good approximation of them, you can use that information to calculate your company’s breakeven point. Small business owners can use the calculation to determine how many product units they need to sell at a given price point to break even. 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. The total fixed costs are $50k, and the contribution margin ($) is the difference between the selling price per unit and the variable cost per unit. So, after deducting $10.00 from $20.00, the contribution margin comes out to $10.00. For instance, if management decided to increase the sales price of the couches in our example by $50, it would have a drastic impact on the number of units required to sell before profitability.
- For fixed costs incurred on a quarterly basis, divide the cost amount by four.
- If the stock is trading below this, then the benefit of the option has not exceeded its cost.
- The break-even point is when the total expenses of your business are equal to the total sales you make.
- 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.
- For any new business, this is an important calculation in your business plan.
For example, a company has $450,000 in fixed and administration costs. Calculating the break-even number of units can be valuable for all business areas because it allows a company to determine the units it needs to sell to make a profit. In a recent month, local flooding caused Hicks to close for several days, reducing the number of units they could ship and sell from 225 units to 175 units. The break-even point for Hicks Manufacturing at a sales volume of $22,500 (225 units) is shown graphically in Figure 3.5. Once you crunch the numbers, you might find that you have to sell a lot more products than you realized to break even.
The break-even point formula is calculated by dividing the total fixed costs of production by the price per unit less the variable costs to produce the product. Revenue represents total income generated from the sale of goods or services by an individual or business. The contribution margin is the difference between revenue and variable costs. The final component of break-even analysis, the break-even point, is the level of sales where total revenue equals total costs. Returning to the example above, the contribution margin ratio is 40% ($40 contribution margin per item divided by $100 sale price per item).
Calculate your total variable costs per unit
Costs may change due to factors such as inflation, changes in technology, or changes in market conditions. The total variable costs will therefore be equal to the variable cost per unit of $10.00 multiplied by the number of units sold. For a service business, the units could be the company’s hours billed to clients. 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.
What is Break-Even Analysis?
Learn financial statement modeling, DCF, M&A, LBO, Comps and Excel shortcuts. Or, if using Excel, the break-even point can be calculated using the “Goal Seek” function. Break-even analysis formulas can help you compare different pricing strategies. Take your learning and productivity to the next level with our Premium Templates. Finally, we can easily build a sensitivity matrix to explore how these factors interact. Given various cost structures, we can see a range of break-even prices from $28 to $133.
What is the Break-Even Analysis Formula?
The break even point formula shows you how much you should sell so that your expenses and revenue balance. If there is a realistic target then your team knows what to cash budget template work towards rather than just work aimlessly. Break-even analysis shows the time frame during which the targets must be met and how many products need to be sold.
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.
Learn about semi-variable costs
Companies typically do not want to simply break even, as they are in business to make a profit. Break-even analysis also can help companies determine the level of sales (in dollars or in units) that is needed to make a desired profit. The process for factoring a desired level of profit into a break-even analysis is to add the desired level of profit to the fixed costs and then calculate a new break-even point. We know that Hicks Manufacturing breaks even at 225 Blue Jay birdbaths, but what if they have a target profit for the month of July? By calculating a target profit, they will produce and (hopefully) sell enough bird baths to cover both fixed costs and the target profit.
The break-even point in economics, business, cost accounting, and financial planning is one of the simplest and most commonly used analytical tools. A team charter is one of the most effective ways to increase collaboration and teamwork in a project, business, or company. When you appropriately create such a document, you can motivate and encourage your team members to work as one entity. This calculator provides a graphical representation of break-even point analysis and provides a report based on your input.
We have already established that the contribution margin from 225 units will put them at break-even. When sales exceed the break-even point the unit contribution margin from the additional units will go toward profit. What happens when Hicks has a busy month and sells \(300\) Blue Jay birdbaths? We have already established that the contribution margin from \(225\) units will put them at break-even. If you have fixed costs that do not incur monthly you should still include them, but calculate the monthly amount that goes towards that expense.
This is specifically true for those products that are going to be costly. If you perform a break-even point analysis then you will know whether the goal is achievable or not and whether it is a good idea to go about manufacturing the product. The primary purpose of break-even analysis is to determine the minimum output that must be exceeded for a business to be profitable. The break-even analysis is an internal management cost accounting tool that provides a dynamic view of the relationships between cost, volume, and profit (CVP). The point at which a company expects neither a profit nor a loss on the total number of products or services sold.
The break-even formula gives a company the number of units of products and services it must sell to generate enough revenue to cover its fixed costs. The break-even point occurs when all fixed costs have been paid on the sale of the last unit. After that, the difference between the variable costs and the selling price is profit. A company is selling below the break-even number of units and is therefore operating at a loss.
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Please note that this can be either per unit or total or expressed as a percentage. Get instant access to lessons taught by experienced private equity pros and bulge bracket investment bankers including financial statement modeling, DCF, M&A, LBO, Comps and Excel Modeling. Manu Lakshmanan is a member of WSO Editorial Board which helps ensure the accuracy of content across top articles on Wall Street Oasis.