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# Break-Even Point Formula, Methods to Calculate, Importance

July 22, 2024
Bill Kimball

For instance, if the company sells 5.5k products, its net profit is \$5k. 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 (BEP) helps businesses with pricing decisions, sales forecasting, cost management, and growth strategies. A business would not use break-even analysis to measure its repayment of debt or how long that repayment will take. If the price stays right at \$110, they are at the BEP because they are not making or losing anything.

## Break-Even Point Formula and Analysis: How to Calculate BEP for Your Business

Adam received his master’s in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem. For information pertaining to the registration status of 11 Financial, please contact the state securities regulators for those states in which 11 Financial maintains a registration filing.

## How to Conduct Break-Even Analysis

It is also helpful to note that the sales price per unit minus variable cost per unit is the contribution margin per unit. For example, if a book’s selling price is \$100 and its variable costs are \$5 to make the book, \$95 is the contribution margin per unit and contributes to offsetting the fixed costs. 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 price of goods sold at fluctuates, and the cost of raw materials may hardly stay stable.

## Methods to Calculate Break-Even Point

If the same cost data are available as in the example on the algebraic method, then the contribution is the same (i.e., \$16). Using the algebraic method, we can also identify the break-even point in unit or dollar terms, as illustrated below. Take your learning and productivity to the next level with our Premium Templates. Access and download collection of free Templates to help power your productivity and performance. Or, if using Excel, the break-even point can be calculated using the “Goal Seek” function. If a company has reached its break-even point, the company is operating at neither a net loss nor a net gain (i.e. “broken even”).

With the contribution margin calculation, a business can determine the break-even point and where it can begin earning a profit. A firm with lower fixed costs will have a lower break-even point of sale and \$0 of fixed costs will automatically have broken even with the sale of the first product, assuming variable costs do not exceed sales revenue. 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. Your variable costs (or variable expenses) are the expenses that do change with your sales volume. This is the price of raw materials, labor, and distribution for the goods or service you sell.

Break-even analysis, or the comparison of sales to fixed costs, is a tool used by businesses and stock and option traders. It is essential in determining the minimum sales volume required to cover total costs and break even. Calculating the breakeven point is a key financial analysis tool used by business owners. 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. 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.

Thus, if a project costs \$1 million to undertake, it would need to generate \$1 million in net profits before it breaks even. Are you saying that Ivana does not need fixed costs, or that she does? The latter is true, she must have fixed costs to calculate break even. Upon doing so, the number of units sold cell changes to 5,000, and our net profit is equal to zero. Once the break-even number of units is determined, the company then knows what sales target it needs to set in order to generate profit and reach the company’s financial goals.

Fortunately, you can answer this question by calculating your break-even point. Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance.

1. Are you saying that Ivana does not need fixed costs, or that she does?
2. By looking at each component individually, you can start to ask yourself critical questions about your pricing and costs.
3. If you’re having trouble hitting your break-even point or it seems unreachable, it’s time to make a change.
4. The total variable costs will therefore be equal to the variable cost per unit of \$10.00 multiplied by the number of units sold.

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). Alternatively, the break-even point can also be calculated by dividing the fixed costs by the contribution margin. At this point, you need to ask yourself whether your current plan is realistic or whether you need to raise prices, find a way to cut costs, or both. You should also consider whether your products will be successful on the market. Just because the break-even analysis determines the number of products you need to sell, there’s no guarantee that they will sell.

For example, semi-variable costs, which have both fixed and variable components, can complicate the accuracy of the breakeven calculation which then changes the breakeven point in units. The total variable costs will therefore be equal to the variable cost per unit of \$10.00 multiplied by the number of units sold. In terms of its cost structure, the company has fixed costs (i.e., constant regardless of production volume) that amounts to \$50k per year. Recall, fixed costs are independent of the sales volume for the given period, and include costs such as the monthly rent, the base employee salaries, and insurance. Upon selling 500 units, the payment of all fixed costs is complete, and the company will report a net profit or loss of \$0.

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. You would not be able to calculate the break-even quantity of units unless you have revenue and variable cost per unit.

The following break-even point analysis formulas will help you get there. For more cost cutting ideas, check out our guide of 25 ways to cut costs. If you’re having trouble hitting your break-even point or it seems unreachable, it’s time to make a change. A financial professional will offer guidance based on the information provided and offer a no-obligation call to better understand your situation.

We may earn a commission when you click on a link or make a purchase through the links on our site. All of our content is based on objective analysis, and the opinions are our own. It is only useful for determining whether a company is making a profit or not at a given point in time.

Assume an investor pays a \$4 premium for a Meta (formerly Facebook) put option with a \$180 strike price. That allows the put buyer to sell 100 shares of Meta stock (META) at \$180 per share until the option’s expiration date. The put position’s breakeven price is \$180 minus the \$4 premium, or \$176. If the stock is trading above that price, then the benefit of the option has not exceeded its cost. 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.