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How to Calculate Your Break-Even Point

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At its simplest, a break-even point (or BEP) is the point at which your business’s expenses equal its revenue. In other words, if you’re breaking even, you aren’t spending more than you’re making—which also means you aren’t making more than you’re spending. At your break-even point, your business isn’t profitable, but it also isn’t losing money: it’s at an exact net neutral.

Like a lot of supposedly simple accounting principles , the break-even point is a little harder to understand than it initially appears. Let’s dive into how to calculate your break-even point and how it can guide your business.

How do you calculate your break-even point?

The basic break-even point calculation is pretty simple (we've got an example that spells it out further down):

Break-even point = Total fixed costs / (price per unit – variable costs per unit)

Of course, before you can calculate your break-even point, you need to figure out your total fixed costs, variable costs per unit, and price per unit:

• Total fixed costs are expenses that stay the same regardless of how many products you sell. Costs like rent, salaries, and fixed interest rate payments all count as fixed costs.
• Variable costs per unit are expenses that vary with product creation. For instance, your sales commissions, shipping costs, and costs of raw materials vary month to month depending on how many products you sell.
• Price per unit means how much you sell each product for. You’re the one who sets this cost, and a break-even point can show if you’re selling your product for too little or too much (more on that below).

The answer to the equation will tell you how many units (meaning individual products) you need to sell to match your expenses.

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!). In contrast, variable costs are per unit.

While gathering the information you need to calculate your break-even point is tricky and time consuming, you don’t have to crunch the numbers with just a pen and paper. Any number of free online break-even point calculators can help, like this calculator by the National Association for the Self-Employed.

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What is an example of a break-even point calculation?

Let’s say Maria owns a small business that primarily sells handmade quilts. Between rent, property insurance, and other crucial expenses, Maria’s fixed costs total $2,000 a month. She sells each quilt for $500 each and determines that variable expenses for each product come to about $250. For her, the break-even point formula would look like this:

$2,000 / ($500 – $250) = 8 products/month

So to break even, Maria needs to create and sell eight quilts a month. If she wants to turn a profit, she'll need to sell at least nine quilts a month.

What does your break-even point tell you?

Your break-even point can help you answer the following questions:

• How many products do you need to produce and sell before you start turning a profit?
• Are you selling your products at too low a price per unit to make a profit?
• Do you need to lower any fixed costs (e.g., your own salary, your advertising budget, or your electric bill) to break even?
• Is your business model sustainable? In other words, is it even possible for you to break even given your anticipated fixed expenses, costs of labor, sales, and costs of production?

In our example above, Maria’s break-even point tells her she needs to create eight quilts a month, right? But what if she knows she can create only six a month given her current time and resources? Well, per the equation, she might need to up her cost per unit to offset the decreased production. Or she could find a way to lower her total fixed costs—say, by scouting around for a better property insurance rate or fabric supplier.

The takeaway

Once you calculate your break-even point, you can determine how many products you need to manufacture and sell to make your business profitable.

Want software that can help you calculate your break-even point? Check out our piece on the best bookkeeping software for small-business owners.

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5 Easy Steps to Creating a Break-Even Analysis

• What Break-Even is Used For

Gathering Information for Analysis

• Steps to Break-Even Analysis

Analyzing a Break-Even Chart

Break-even is one of those vital numbers that can mean success or failure to a small business. If you are breaking even your income is are equal to your costs. You have no profit or loss at this point. But, above the break-even point, every dollar of sales is pure profit.   

How to Use a Break-Even Analysis in Financial Planning

A break-even analysis is important in several different situations: 

• As your business plans new products, knowing the break-even point helps you price more efficiently.
• As you plan your overall business cash and profit strategy, break-even can be used to determine profit points for product lines. 
• As your business plans for financing, knowing your overall company breakeven point can help make your case for a business loan. 

A lender or investor will probably want to see this information in the financial report section of your business plan .

Before you begin your break-even analysis, you'll need some information. Let's say you're dong an analysis for a potential new product. Make a list of all your costs and expenses relating to that product, including facilities, the cost of materials and supplies, machines or equipment, and costs for paying employees to make the product and prepare it to ship.

You'll also need to know two other pieces of information:

• The range of prices you are considering, starting at $0.00
• The range of quantities you estimate being able to sell, starting at none (0)

You will need to separate out fixed costs and variable costs . Fixed costs are those you must pay even if you have no sales (like rent and utilities). Variable costs are those you spend to make and sell and ship products (like raw materials, supplies, and labor).

5 Steps to Creating a Break-Even Analysis

Here are the steps to take to determine break-even:

• Determine variable unit costs: Determine the variable costs of producing one unit of this product. Variable costs are those costs associated with making the product or buying it wholesale. If you are making a product, you will need to know the cost of all the components that go into that product. For example, if you are printing books, your variable unit costs are paper, binding, and glue for one book, and the cost to put one book together.
• Determine fixed costs: Fixed costs are costs to keep your business operating, even if you didn't produce any products. To determine fixed costs, add up the cost of running your factory for one month. These costs would include rent or mortgage, utilities, insurance, salaries of non-production employees, and all other costs. Don't forget the cost to design the product and packaging, make the prototype, and maybe patent your product.
• Determine unit selling price: Determine the unit selling price for your product. This price may change as you see where your break-even point is.
• Determine sales volume and unit price: The break-even point will change as the sales volume for this product and the unit price change.
• Create a spreadsheet: To do a break-even calculation, you will construct or use a spreadsheet then turn the spreadsheet into a graph. The spreadsheet will plot break-even for each level of sales and product price, and it will create a graph showing you break-even for each of these prices and sales volumes. 

A simple formula for break-even is:

Break-even quantity = Fixed costs/(Sales price per unit –Variable cost per unit).

This formula is best expressed in a spreadsheet because variable cost changes. The spreadsheet shows you break-even for a range of costs and sales prices.  

You can use Excel or another spreadsheet to create a break-even analysis chart. SCORE has an Excel template , or you can use this one form Microsoft . You'll need someone who's familiar with Excel to tweak the spreadsheet to your specific situation.

Now that you have break-even, what do you do with this information? You want to find the highest price you can sell the product at and still make a profit. See what happens when you change either fixed or variable costs to see what happens if you reduce them. Maybe you can increase the volume by finding new markets. What happens when output volume rises or falls. All of these can affect your business profits on this product.  

Of course, a break-even analysis isn't created in a vacuum. If you're creating a new product that no one's ever seen before, you have no idea what the volume would be or how soon competitors might pop up. But at least it gives you a way to begin your search for the "best" price for your product.

SCORE.org. " Break-Even Analysis Template ." Accessed Sept. 10, 2020.

Corporate Finance Institute. " Break Even Analysis ." Accessed Sept. 10, 2020.

Harvard Business Review. " A Quick Guide to Breakeven Analysis ." Accessed Sept. 10, 2020.

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Break-Even Analysis Explained - Full Guide With Examples

Did you know that 30% of operating small businesses are losing money? Running your own business is trickier than it sounds. You have to plan ahead carefully to break-even or be profitable in the long run.

Building your own small business is one of the most exciting, challenging, and fun things you can do in this generation.

To start and sustain a small business it is important to know financial terms and metrics like net sales, income statement and most importantly break-even point .

Performing break-even analysis is a crucial activity for making important business decisions and to be profitable in business.

So how do you do it? That is what we will go through in this article. Some of the key takeaways for you when you finish this guide would be:

• Understand what break-even point is
• Know why it is important
• Learn how to calculate break-even point
• Know how to do break-even analysis
• Understand the limitations of break-even analysis

So, if you are tired of your nine-to-five and want to start your own business, or are already living your dream, read on.

What is Break-Even Point?

Small businesses that succeeds are the ones that focus on business planning to cross the break-even point, and turn profitable .

In a small business, a  break-even point is a point at which total revenue equals total costs or expenses. At this point, there is no profit or loss — in other words, you 'break-even'.

Break-even as a term is used widely, from stock and options trading to corporate budgeting as a margin of safety measure.

On the other hand, break-even analysis lets you predict, or forecast your break-even point. This allows you to course your chart towards profitability.

Managers typically use break-even analysis to set a price to understand the economic impact of various price and sales volume calculations.

The total profit at the break-even point is zero. It is only possible for a small business to pass the break-even point when the dollar value of sales is greater than the fixed + variable cost per unit.

Every business must develop a break-even point calculation for their company. This will give visibility into the number of units to sell, or the sales revenue they need, to cover their variable and fixed costs.

Importance of Break-Even Analysis for Your Small Business

A business could be bringing in a lot of money; however, it could still be making a loss. Knowing the break-even point helps decide prices, set sales targets, and prepare a business plan.

The break-even point calculation is an essential tool to analyze critical profit drivers of your business, including sales volume, average production costs, and, as mentioned earlier, the average sales price. Using and understanding the break-even point, you can measure

• how profitable is your present product line
• how far sales drop before you start to make a loss
• how many units you need to sell before you make a profit
• how decreasing or increasing price and volume of product will affect profits
• how much of an increase in price or volume of sales you will need to meet the rise in fixed cost

How to Calculate Break-Even Point

There are multiple ways to calculate your break-even point.

Calculate Break-even Point based on Units

One way to calculate the break-even point is to determine the number of units to be produced for transitioning from loss to profit.

For this method, simply use the formula below:

Break-Even Point (Units) = Fixed Costs ÷ (Revenue per Unit – Variable Cost per Unit)

Fixed costs are those that do not change no matter how many units are sold. Don't worry, we will explain with examples below. Revenue is the income, or dollars made by selling one unit.

Variable costs include cost of goods sold, or the acquisition cost. This may include the purchase cost and other additional costs like labor and freight costs.

Calculate Break-Even Point by Sales Dollar - Contribution Margin Method

Divide the fixed costs by the contribution margin. The contribution margin is determined by subtracting the variable costs from the price of a product. This amount is then used to cover the fixed costs.

Break-Even Point (sales dollars) = Fixed Costs ÷ Contribution Margin

Contribution Margin = Price of Product – Variable Costs

Let’s take a deeper look at the some common terms we have encountered so far:

• Fixed costs: Fixed costs are not affected by the number of items sold, such as rent paid for storefronts or production facilities, office furniture, computer units, and software. Fixed costs also include payment for services like design, marketing, public relations, and advertising.
• Contribution margin:   Is calculated by subtracting the unit variable costs from its selling price. So if you’re selling a unit for $100 and the cost of materials is $30, then the contribution margin is $70. This $70 is then used to cover the fixed costs, and if there is any money left after that, it’s your net profit.
• Contribution margin ratio: is calculated by dividing your fixed costs from your contribution margin. It is expressed as a percentage. Using the contribution margin, you can determine what you need to do to break-even, like cutting fixed costs or raising your prices.
• Profit earned following your break-even: When your sales equal your fixed and variable costs, you have reached the break-even point. At this point, the company will report a net profit or loss of $0. The sales beyond this point contribute to your net profit.

Small Business Example for Calculating Break-even Point

To show how break-even works, let’s take the hypothetical example of a high-end dressmaker. Let's assume she must incur a fixed cost of $45,000 to produce and sell a dress.

These costs might cover the software and materials needed to design the dress and be sure it meets the requirement of the brand, the fee paid to a designer to design the look and feel of the dress, and the development of promotional materials used to advertise the dress.

These costs are fixed as they do not change per the number of dresses sold.

The variable costs would include the materials used to make each dress — embellishment’s for $30, the fabric for the body for $20, inner lining for $10 — and the labor required to assemble the dress, which amounted to one and a half hours for a worker earning $50 per hour.

Thus, the unit variable costs to make a single dress is $110 ($60 in materials and $50 in labor). If she sells the dress for $150, she’ll make a unit margin of $40.

Given the $40 unit margin she’ll receive for each dress sold, she will cover her $45,500 total fixed cost will be covered if she sells:

Break-Even Point (Units) = $45,000 ÷ $40 = 1,125 Units

You can see per the formula , on the right-hand side, that the Break-even is 1,125 dresses or units

In other words, if this dressmaker sells 1,125 units of this particular dress, then she will fully recover the $45,000 in fixed costs she invested in production and selling. If she sells fewer than 1,125 units, she will lose money. And if she sells more than 1,125 units, she will turn a profit. That’s the break-even point.

What if we change the price?

Suppose our dressmaker is worried about the current demand for dresses and has concerns about her firm’s sales and marketing capabilities, calling into question her ability to sell 1,125 units at a price of $150. What would be the effect of increasing the price to $200?

This would increase the unit margin to $90.Then the number of units to be sold would decline to 500 units. With this information, the dressmaker could assess whether she was better off trying to sell 1,125 dresses at $150 or 500 dresses at $200, and priced accordingly.

What if we want to make an investment and increase the fixed costs?

Break-even analysis also can be used to assess how sales volume would need to change to justify other potential investments. For instance, consider the possibility of keeping the price at $150, but having a celebrity endorse the dress (think Madonna!) for a fee of $20,000.

This would be worthwhile if the dressmaker believed that the endorsement would result in total sales of $66,000 (the original fixed cost plus the $20,000 for Ms. Madonna).

With the Fixed Costs at $66,000 we see, it would only be worthwhile if the dressmaker believed that the endorsement would result in total sales of 1,650 units.

In other words, if the endorsement led to incremental sales of 525 dress units, the endorsement would break-even. If it led to incremental sales of greater than 525 dresses, it would increase profits.

What if we change the variable cost of producing a good?

Break-even also can be used to examine the impact of a potential change to the variable cost of producing a good.

Imagine that our dressmaker could switch from using a rather plain $20 fabric for the dress to a higher-end $40 fabric, thereby increasing the variable cost of the dress from $110 to $130 and decreasing the unit margin from $40 to $20. How much would your sales need to increase to compensate for the extra cost?

Suppose the Variable Cost is $130 (and the Fixed Cost is $45,000 – our dressmaker can’t afford to have nice fabric plus get Ms. Madonna). It would make better sense to switch to the nicer fabric if the dressmaker thought it would result in sales of 2,250 units, an additional 1125 dresses, which is double the number of initial sale numbers.

You likely aren’t a dressmaker or able to get a celebrity endorsement from Ms. Madonna, but you can use break-even analysis to understand how the various changes of your product, from revenue, costs, sales, impact your small business’s profitability .

What Are the Benefits of Doing a Break-even Analysis?

Smart Pricing : Finding your break-even point will help you price your products better. A lot of effort and understanding goes into effective pricing, but knowing how it will affect your profitability is just as important. You need to make sure you can pay all your bills.

Cover Fixed Costs : When most people think about pricing, they think about how much their product costs to create. Those are considered variable costs. You will still need to cover your fixed costs like insurance or web development fees. Doing a break-even analysis helps you do that.

Avoid Missing Expenses : When you do a break-even analysis, you have to lay out all your financial commitments to figure out your break-even point. It’s easy to forget about expenses when you’re thinking through a business idea.  This will limit the number of surprises down the road.

Setting Revenue Targets : After completing a break-even analysis, you know exactly how much you need to sell to be profitable. This will help you set better sales goals for you and your team.

Decision Making : Usually, business decisions are based on emotion. How you feel is important, but it’s not enough. Successful entrepreneurs make their decisions based on facts. It will be a lot easier to decide when you’ve put in the work and have useful data in front of you.

Manage Financial Strain : Doing a break-even analysis will help you avoid failures and limit the financial toll that bad decisions can have on your business. Instead, you can be realistic about the potential outcomes by being aware of the risks and knowing when to avoid a business idea.

Business Funding : For any funding or investment, a break-even analysis is a key component of any business plan. You have to prove your plan is viable. It’s usually a requirement if you want to take on investors or other debt to fund your business.

When to Use Break-even Analysis

Starting a new business.

If you’re thinking about a small online business or e-commerce, a break-even analysis is a must. Not only does it help you decide if your business idea is viable, but it makes you research and be realistic about costs, as well as think through your pricing strategy.

Creating a new product

Especially for a small business, you should still do a break-even analysis before starting or adding on a new product in case that product is going to add to your expenses. There will be a need to work out the variable costs related to your new product and set prices before you start selling.

Adding a new sales channel

If you add a new sales channel, your costs will change. Let's say you have been selling online, and you’re thinking about opening an offline store; you’ll want to make sure you at least break-even with the brick and mortar costs added in. Adding additional marketing channels or expanding social media spends usually increases daily expenses. These costs need to be part of your break-even analysis.

Changing the business model

Let's say you are thinking about changing your business model; for example, switching from buying inventory to doing drop shipping or vice-versa, you should do a break-even analysis. Your costs might vary significantly, and this will help you figure out if your prices need to change too.

Limitations of Break-even Analysis

• The Break-even analysis focuses mostly on the supply-side (i.e., costs only) analysis. It doesn't tell us what sales are actually likely to be for the product at various prices.
• It assumes that fixed costs are constant. However, an increase in the scale of production is likely to lead to an increase in fixed costs.
• It assumes average variable costs are constant per unit of output, per the range of the number of sales
• It assumes that the number of goods produced is equal to the number of goods sold. It believes that there is no change in the number of goods held in inventory at the beginning of the period and the number of goods held in inventory at the end of the period
• In multi-product companies,  the relative proportions of each product sold and produced are fixed or constant.

So that's a wrap. Hope you found this article interesting and informative. Feel free to subscribe to our blog to get updates on awesome new content we publish for small business owners.

Key Takeaways

Break-even analysis is infinitely valuable as it sets the framework for pricing structures, operations, hiring employees, and obtaining future financial support.

• You can identify how much, or how many, you have to sell  to be profitable.
• Identify costs inside your business that should be alleviated or eliminated.

Remember, any break-even analysis is only as strong as its underlying assumptions.

Like many forecasting metrics, break-even point is subject to it's limitations; however it can be a powerful and simple tool to provide a small business owner with an idea of what their sales need to be in order to start being profitable as quickly as possible.

Lastly, please understand that break-even analysis is not a predictor of demand .

If you go to market with the wrong product or the wrong price, it may be tough to ever hit the break-even point. To avoid this, make sure you have done the groundwork before setting up your business.

Head over to our small business guide on setting up a new business if you want to know more.

Want to calculate break even point quickly? Use our handy break-even point calculator.

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Break-Even Analysis: What It Is and How to Calculate

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A break-even analysis helps business owners find the point at which their total costs and total revenue are equal, also known as the break-even point in accounting . This lets them know how much product they need to sell to cover the cost of doing business.

At the break-even point, you’ve made no profit, but you also haven’t incurred any losses. This metric is important for new businesses to determine if their ideas are viable, as well as for seasoned businesses to identify operational weaknesses.

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What is the break-even analysis formula?

The break-even analysis formula requires three main pieces of information:

Fixed costs per month: Fixed costs are what your business has to pay no matter how many units you sell. This could include rent, business insurance , business loan payments, accounting and legal services and utilities.

Sales price per unit: This is the amount of money you will charge the customer for every single unit of product or service you sell. Make sure to include any discounts or special offers you give customers. If you sell multiple products or services, figure out the average selling price for everything combined.

Variable costs per unit: These are the costs you incur for each unit you sell. They may include labor, the price of raw materials or sales commissions, and they are subject to change as sales fluctuate. To calculate, multiply the number of units produced by the costs of producing just one unit.

From there, the break-even point can be calculated in units.

Break-even point in units = fixed costs / (sales price per unit – variable costs per unit)

This gives you the number of units you need to sell to cover your costs per month. Anything you sell above this number is profit. Anything below this number means your business is losing money.

Once you’re above the break-even point, every additional unit you sell increases profit by the amount of the unit contribution margin. This is the amount each unit contributes to paying off fixed costs and increasing profits, and it’s the denominator of the break-even analysis formula. To find it, subtract variable costs per unit from sales price per unit.

» MORE: Best apps for small businesses

Break-even analysis example

Let's say you're thinking about starting a furniture manufacturing business. The first unit you're going to sell is a table. How many tables would you need to sell in order to break even?

If it costs $50 to make a table and you have fixed costs of $1,000, the number of tables you must sell to break even varies depending on price. Here are two scenarios:

If you sell a table at $100: $1,000 / ($100 — $50) = 20 tables

If you sell a table at $200: $1,000 / ($200 — $50) = 6.7 tables

This is a great example of how selling a product for a higher price allows you to reach the break-even point significantly faster. However, you need to think about whether your customers would pay $200 for a table, given what your competitors are charging.

» MORE: NerdWallet’s picks for the best small-business accounting software

When to use break-even analysis

Break-even analysis formulas can help you compare different pricing strategies.

For example, if you raise the price of a product, you’d have to sell fewer items, but it might be harder to attract buyers. You can lower the price, but would then need to sell more of a product to break even. It can also hint at whether it’s worth using less expensive materials to keep the cost down, or taking out a longer-term business loan to decrease monthly fixed costs.

Here are a few specific situations where a break-even analysis is especially useful:

Starting a new business: When starting a business , break-even analysis can help you figure out the viability of your product or service. If you do this analysis along with writing a business plan, you can spot weak points in your company's financial strategy and develop a plan to address them.

Launching a new product or service: Whenever you launch a new product or service, you'll need to determine its sale price and how much it costs to produce it. Using a break-even analysis, you can see how both of these factors affect your profitability. Eventually, you can choose a price that's fair to customers and realistic for your company.

Adding a new sales channel: If your business model changes to incorporate a new sales channel, that's a good opportunity to do a break-even analysis. For example, if you have a brick-and-mortar store but want to start an e-commerce business, your costs and pricing might change. You should make sure you at least break even so that you don't put too much financial strain on your business.

This article originally appeared on Fundera, a subsidiary of NerdWallet.

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Break-Even Analysis Explained—How to Find the Break-Even Point

Posted november 2, 2022 by kiara taylor.

Conducting a break-even analysis is a crucial tool for small business owners. If you’re planning on launching a business, writing a business plan , or just exploring a new product, knowing your break-even point can tell you whether or not a product or service is a good idea.

In this guide, we’ll cover what a break-even point is, why it’s critical to calculate, how to calculate it, and additional factors you should consider. 

What is the break-even point?

The break-even point is where an asset’s market price equals its original cost. Put another way; the break-even point is when the total revenues of a certain production level equal the total expenses of producing that product. For small business owners, it’s essentially the amount that you need to earn in order to cover your costs.  

Why you should know your break-even point

So, why is knowing your break-even point so important? Here are a few important reasons to consider.

Minimize risk

Risk comes in various forms , but break-even points can help you understand the viability of certain products before they’re even launched. 

For example, before even sending an order to a factory, you can already know how many units you need to sell and what expenses will go into making that product. Understanding this is key whether you’re launching a business for the first time or starting a new product line.

Identify unseen expenses

Running a break-even analysis forces you to outline all potential expenses associated with an initiative. Expenses that you’d otherwise miss without it. Usually, these expenses come from the fixed and variable costs of production. In this process, you can often identify unexpected expenses that you may not have considered before.

Appropriately price your products/services

Because your break-even point concerns the price relationship to your expenses, you can calculate different break-even points based on sold units or different pricing schemes. For example, you may find that your product is unprofitable at a certain price point except at extremely large scales. 

If that’s the case, you can explore higher price points. However, it’s important that you do not do this in isolation. Instead, use this exercise to understand potential pricing options and begin testing them with your target customers .

Prepare for funding

If you’re seeking funding for your business, this information is often expected or required by lenders and investors . It helps them gauge the viability of your idea and determine what level of funding is appropriate. For you as a business owner, it can help you determine how much funding you think you’ll need and even identify how you’ll use those funds.

How to calculate the break-even point

To calculate your break-even point, you’ll need to know the following: 

• Fixed costs: Expenses that remain consistent no matter your sales volume.
• Variable costs: Expenses that change depending on your sales/production volume.
• Sales price: The price that you intend to sell the product/service for.

Break-even point formula

The break-even point is calculated using your fixed costs and your contribution margin. The contribution margin is the selling price of the product minus the total variable costs. Your selling price is usually the amount you place on any customer invoices. 

The contribution margin formula is:

Contribution Margin = Selling Price – Total Variable Costs

Once you have the contribution margin, you then take the total fixed costs per unit and divide those costs by the contribution margin. This will give you the break-even number of units required to offset your costs.

The break-even point formula is:

Break-Even Point = Fixed Costs / Contribution Margin

Break-even point example

Now that you know the formula for calculating your break-even point let’s put it into practice.

Imagine you are the owner of a small paper company and considering adding a new line of paper to your available products. You expect to sell a ream of paper for $5.00. 

The variable costs of the ream of the paper include: 

• $1.00 for the paper itself
• $0.50 for the packaging of the ream
• $0.50 of costs to package each ream

According to this information, you have $2.00 in variable costs. Using the formula mentioned above, we can calculate the contribution margin for your paper ream:

$5.00 – $2.00 = $3.00

Next, we’ll incorporate fixed costs to determine how many units need to be sold. After holding an office meeting in the conference room, you determine that the following fixed costs are associated with producing reams of paper:

• $50.00 in salaries
• $50.00 in office rent
• $50.00 for monthly shipments from the paper factory

Your total fixed costs come to: $50.00 + $50.00 + $50.00 = $150.00.

Lastly, we’ll calculate the break-even point: $150.00 / $3.00 = 50 units. To break even, you would need to sell 50 reams of paper. 

Maximizing your break-even point formulas

You can also utilize this calculation to figure out your break-even point in dollars. This is done by dividing the total fixed costs by the contribution margin ratio. You can figure out your contribution margin ratio by taking the contribution margin per unit and dividing it by the sales price. 

Your contribution margin ratio using the data from the above example is:

$3.00 (your contribution margin) / $5.00 (price per one ream of paper) = 60%.

Finally, divide your total fixed costs ($150.00) by your contribution margin ratio (60%) to calculate the break-even point in dollars:

$150.00 / 60% = $250.00 in sales

You can confirm your findings by multiplying your break-even point in units (50) by the sales price ($5.00):

50 x $5.00 = $250.00

What is a standard break-even time period?

The standard break-even period is hard to predict and fully depends on your business. However, once you know your break-even point, you can gauge the time it will take to break even more accurately.

Your break-even period is the amount of time it takes you to sell enough units to break even. This means that the only thing holding back your ability to break even is how fast you sell your units.

The formula to calculate your break-even time period is:

Break-Even Time Period = Break-Even Units / Amount Sold per Period (Period)

If we return to the paper company example, we can estimate what the break-even period is. After reviewing your financials, you learn that the average number of reams you expect to sell daily is 5. Now, take your number of break-even units (50) and divide them by the amount sold in a given period (5):

50 / 5 = 10. Under this analysis, you would break even in approximately 10 days.

However, it’s important to remember that fixed costs, which are an important part of calculating your break-even point, may accumulate faster than you can sell your product. In that case, you’ll need to factor this into your analysis.

How to lower your break-even point

Everyone wants to lower their break-even point because it typically leads to greater profitability at a faster rate. But how do you lower your break-even point? The key thing to remember is that it’s a ratio of your fixed and variable costs. To reduce your break-even point, you’ll need to lower one or both.

One of the most efficient ways to reduce your break-even point is to start by reducing variable costs. Keep in mind that variable costs are associated with each unit. Other fixed costs, those that exist regardless, like the $20-$80 you pay for your employees’ no medical life insurance every month, can be more difficult to eliminate because they are essential.

What you can do with a break-even analysis

Conducting an initial break-even analysis is incredibly useful when starting a business. But, did you know that you can use it on an ongoing basis as part of your management process ? Here are a few key uses you can leverage.

Determine if your prices are correct

A break-even analysis can be used to continuously audit and fine-tune your pricing strategy. If you find sales are missing expectations, you can reference this calculation to easily understand what quantities must be sold if you decide to adjust the price. 

Explore current fixed and variable costs

You can also explore how different costs impact your bottom line. At the end of the day, your business needs to know what costs are impacting its ability to generate revenue. A break-even analysis can help you understand whether some products may be costing you more money than their worth. For example, products with low contribution margins or ratios might be too expensive to keep in production.

Narrow down financial scenarios

Finally, you can use your break-even analyses as part of any forecast scenarios that you explore. By changing numbers in your formula, you can test different types of prices and quantities based on perceived consumer interest. This can help inform a larger analysis of your sales, cash, and expenses based on how reasonable your price and volume adjustments are.

Other metrics to consider

Now that you understand break-even points and break-even analysis, you’ll be able to put them to work for your business. Remember, this is just a piece of measuring business performance and there are other valuable metrics you should be tracking. You can do this manually with spreadsheets, leverage budgeting and accounting software, or better explore future performance with LivePlan’s performance tracking and forecasting features .

Whatever option you choose, the important thing is that you are aware of these metrics and actively using them. It will help you better understand the health of your business, make more strategic decisions, and ultimately grow your business.

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Breakeven Point: Definition, Examples, and How to Calculate

What Is the Breakeven Point (BEP)?

The breakeven point ( breakeven price ) for a trade or investment is determined by comparing the market price of an asset to the original cost; the breakeven point is reached when the two prices are equal.

In corporate accounting, the breakeven point (BEP) formula is determined by dividing the total fixed costs associated with production by the revenue per individual unit minus the variable costs per unit. In this case, fixed costs refer to those that do not change depending upon the number of units sold. Put differently, the breakeven point is the production level at which total revenues for a product equal total expenses.

Key Takeaways

• In accounting, the breakeven point is calculated by dividing the fixed costs of production by the price per unit minus the variable costs of production.
• The breakeven point is the level of production at which the costs of production equal the revenues for a product.
• In investing, the breakeven point is said to be achieved when the market price of an asset is the same as its original cost.
• A breakeven analysis can help with f i nding missing expenses, limiting decisions based on emotions, establishing goals, securing funding, and setting appropriate prices.

Investopedia / Nez Riaz

Understanding Breakeven Points (BEPs)

Breakeven points (BEPs) can be applied to a wide variety of contexts. For instance, the breakeven point in a property would be how much money the homeowner would need to generate from a sale to exactly offset the net  purchase price , inclusive of closing costs, taxes, fees, insurance, and interest paid on the mortgage—as well as costs related to maintenance and home improvements. At that price, the homeowner would exactly break even, neither making nor losing any money.

Companies can use profit-volume charting to track their earnings or losses by looking at how much product they must sell to achieve profitability. This comparison helps to set sales goals and determine if new or additional product production would be profitable.

Traders also apply BEPs to trades, figuring out what price a security must reach to exactly cover all costs associated with a trade, including taxes, commissions, management fees, and so on. A company’s breakeven point is likewise calculated by taking fixed costs and dividing that figure by the gross profit margin percentage.

A breakeven analysis can help with many things, including:

• Finding missing expenses . A breakeven analysis can help uncover expenses that you otherwise might not have seen coming. Your financial commitments will be determined at the end of a breakeven analysis, so there won’t be any surprises down the line.
• Limiting decisions based on emotions . Making business decisions based on emotions is rarely a good idea, but it can be hard to avoid. A breakeven analysis leaves you with hard facts, which is a better viewpoint from which to make business decisions.
• Setting goals . You will know exactly what kind of goals need to be met to make a profit after a breakeven analysis. This helps you set goals and work toward them.
• Securing funding . Often, you will need to use a breakeven analysis to secure funding and show investors the plan for your business.
• Pricing appropriately . A breakeven analysis will show you how to properly price your products from a business standpoint.

Assume an investor buys Microsoft stock ( MSFT ) at $110. That is now their breakeven point on the trade. If the price moves above $110, the investor is making money. If the stock drops below $110, they are losing money. If the price stays right at $110, they are at the BEP because they are not making or losing anything. Options can help investors who are holding a losing stock position using the option repair strategy .

Call Option Breakeven Point Example

For options trading, the breakeven point is the market price that an underlying asset must reach for an option buyer to avoid a loss if they exercise the option. For a call buyer, the breakeven point is reached when the underlying asset is equal to the strike price plus the premium paid, while the BEP for a put position is reached when the underlying asset is equal to the strike price minus the premium paid. The breakeven point doesn’t typically factor in commission costs, although these fees could be included if desired.

Assume that an investor pays a $5 premium for an Apple stock ( AAPL ) call option with a $170 strike price. This means that the investor has the right to buy 100 shares of Apple at $170 per share at any time before the options expire . The breakeven point for the call option is the $170 strike price plus the $5 call premium, or $175. If the stock is trading below this, then the benefit of the option has not exceeded its cost.

If the stock is trading at $190 per share, the call owner buys Apple at $170 and sells the securities at the $190 market price. The profit is $190 minus the $175 breakeven price, or $15 per share.

Put Option Breakeven Point Example

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.

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). 

The breakeven formula for a business provides a dollar figure that is needed to break even. This can be converted into units by calculating the contribution margin (unit sale price less variable costs). Dividing the fixed costs by the contribution margin will provide how many units are needed to break even.

Business Breakeven = Fixed Costs Gross Profit Margin \begin{aligned} &\text{Business Breakeven} = \frac { \text{Fixed Costs} }{ \text{Gross Profit Margin} } \\ \end{aligned} ​ Business Breakeven = Gross Profit Margin Fixed Costs ​ ​

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.

Assume a company has $1 million in fixed costs and a gross margin of 37%. Its breakeven point is $2.7 million ($1 million ÷ 0.37). In this breakeven point example, the company must generate $2.7 million in revenue to cover its fixed and variable costs. If it generates more sales, the company will have a profit. If it generates fewer sales, there will be a loss.

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. To do this, calculate the contribution margin, which is the sale price of the product less variable costs .

Assume a company has a $50 sale price for its product and variable costs of $10. The contribution margin is $40 ($50 - $10). Divide the fixed costs by the contribution margin to determine how many units the company has to sell: $1 million ÷ $40 = 25,000 units. If the company sells more units than this, it will show a profit. If it sells fewer, there will be a loss.

What is a breakeven point?

A breakeven point is used in multiple areas of business and finance. In accounting terms, it refers to the production level at which total production revenue equals total production costs. In investing, the breakeven point is the point at which the original cost equals the market price. Meanwhile, the breakeven point in options trading occurs when the market price of an underlying asset reaches the level at which a buyer will not incur a loss.

How do you calculate a breakeven point?

Generally, to calculate the breakeven point in business , fixed costs are divided by the gross profit margin. This produces a dollar figure that a company needs to break even. When it comes to stocks, for example, if a trader bought a stock at $200, and nine months later, it reached $200 again after falling from $250, it would have reached the breakeven point.

How do you calculate a breakeven point in options trading?

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 would equal the $10 premium plus the $100 strike price, or $110. On the other hand, if this were applied to a put option, the breakeven point would be calculated as the $100 strike price minus the $10 premium paid, amounting to $90.

A breakeven point tells you what price level, 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.

Calculating breakeven points can be used when talking about a business or with traders in the market when they consider recouping losses or some initial outlay. Options traders also use the technique to figure out what price level the underlying price must be for a trade so that it expires in the money . A breakeven point calculation is often done by also including the costs of any fees, commissions, taxes, and in some cases, the effects of inflation .

OpenStax, Rice University. " Principles of Accounting, Volume 2: Managerial Accounting; 3.2 Calculate a Break-Even Point in Units and Dollars ."

CME Group Education. " Explaining Put Options (Short and Long) ."

CME Group Education. " Explaining Call Options (Short and Long) ."

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A Quick Guide to Breakeven Analysis

It’s a simple calculation, but do you know how to use it?

In a world of Excel spreadsheets and online tools, we take a lot of calculations for granted. Take breakeven analysis. You’ve probably heard of it. Maybe even used the term before, or said: “At what point do we break even?” But because you may not entirely understand the math — and because understanding the formula can only deepen your understanding of the concept — here’s a closer look at how the concept works in reality.

• Amy Gallo is a contributing editor at Harvard Business Review, cohost of the Women at Work podcast , and the author of two books: Getting Along: How to Work with Anyone (Even Difficult People) and the HBR Guide to Dealing with Conflict . She writes and speaks about workplace dynamics. Watch her TEDx talk on conflict and follow her on LinkedIn . amyegallo

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What Is Break-Even Analysis and How to Calculate It for Your Business?

You may have an idea that spurs you to open a business or launch a new product on little more than a hope and a dream. Or, you might just be thinking about expanding a product offering or hiring additional personnel. It’s wise, however, to limit your risk before jumping in. A break-even analysis will reveal the point at which your endeavor will become profitable—so you can know where you’re headed before you invest your money and time.

A break-even analysis will provide fodder for considerations such as price and cost adjustments. It can tell you whether you may need to borrow money to keep your business afloat until you’re pocketing profits, or whether the endeavor is worth pursuing at all.

What Is Break-Even Analysis?

A break-even analysis is a financial calculation that weighs the costs of a new business, service or product against the unit sell price to determine the point at which you will break even. In other words, it reveals the point at which you will have sold enough units to cover all of your costs. At that point, you will have neither lost money nor made a profit.

Key Takeaways

• A break-even analysis reveals when your investment is returned dollar for dollar, no more and no less, so that you have neither gained nor lost money on the venture.
• A break-even analysis is a financial calculation used to determine a company’s break-even point (BEP). In general, lower fixed costs lead to a lower break-even point.
• A business will want to use a break-even analysis anytime it considers adding costs—remember that a break-even analysis does not consider market demand.
• There are two basic ways to lower your break-even point: lower costs and raise prices.

How Break-Even Analysis Works

A break-even analysis is a financial calculation used to determine a company’s break-even point (BEP). It is an internal management tool, not a computation, that is normally shared with outsiders such as investors or regulators. However, financial institutions may ask for it as part of your financial projections on a bank loan application.

The formula takes into account both fixed and variable costs relative to unit price and profit. Fixed costs are those that remain the same no matter how much product or service is sold. Examples of fixed costs include facility rent or mortgage, equipment costs, salaries, interest paid on capital, property taxes and insurance premiums.

Variable costs rise and fall according to changes in sales. Examples of variable costs include direct hourly labor payroll costs, sales commissions and costs for raw material, utilities and shipping. Variable costs are the sum of the labor and material costs it takes to produce one unit of your product.

Total variable cost is calculated by multiplying the cost to produce one unit by the number of units you produced. For example, if it costs $10 to produce one unit and you made 30 of them, then the total variable cost would be 10 x 30 = $300.

What is Contribution Margin?

The contribution margin is the difference (more than zero) between the product’s selling price and its total variable cost. For example, if a suitcase sells at $125 and its variable cost is $15, then the contribution margin is $110. This margin contributes to offsetting fixed costs.

Unit Contribution Margin = Sales Price – Variable Costs

The average variable cost is calculated as your total variable cost divided by the number of units produced.

In general, lower fixed costs lead to a lower break-even point—but only if variable costs are not higher than sales revenue.

Why Does Your Business Need to Perform Break-Even Analysis?

A break-even analysis has broad uses on its own merit. But it’s also a critical element of financial projections for startups and new or expanded product lines. Use it to determine how much seed money or startup capital you’ll need, and whether you’ll need a bank loan.

More mature businesses use break-even analyses to evaluate their risks in a variety of activities such as moving innovative ideas to production, adding or deleting products from the product mix and other scenarios. One example is in budgeting the addition of a new employee. A break-even analysis will reveal how many additional sales it will take to break even on expenses associated with the new hire.

What Is a Standard Break-Even Time Period?

An acceptable break-even window is six to 18 months. If your calculation determines a break-even point will take longer to reach, you likely need to change your plan to reduce costs, increase pricing or both. A break-even point more than 18 months in the future is a strong risk signal.

When to Use a Break-Even Analysis

Basically, a business will want to use a break-even analysis anytime it considers adding costs. These additional costs could come from starting a business, a merger or acquisition, adding or deleting products from the product mix, or adding locations or employees.

In other words, you should use a break-even analysis to determine the risk and value of any business investment, especially when one of these three events occurs:

1. Expanding a business

Break-even points (BEP) will help business owners/CFOs get a reality check on how long it will take an investment to become profitable. For example, calculating or modeling the minimum sales required to cover the costs of a new location or entering a new market.

2. Lowering pricing

Sometime businesses need to lower their pricing strategy to beat competitors in a specific market segment or product. So, when lowering pricing, businesses need to figure out how many more units they need to sell to offset or makeup a price decrease.

3. Narrowing down business scenarios

When making changes to the business, there are various scenarios and what-ifs on the table that complicate decisions about which scenario to go with. BEP will help business leaders reduce decision-making to a series of yes or no questions.

How Do You Calculate the Break-Even Point?

ERP and accounting software with managerial accounting features will typically calculate your BEP for you, but you may want to understand what goes into that equation.

Break-even analysis formula

Break-even quantity = Fixed costs / (Sales price per unit – Variable cost per unit)

You can also use our break-even analysis template.

Use Our Break-Even Analysis Template

Find your break-even point by using this break-even analysis template, customizable to your business.

Get the template

Break-even analysis example

Beth has dreams of opening a gourmet cupcake store. She does a break-even analysis to determine how many cupcakes she’ll have to sell to break even on her investment. She’s done the math, so she knows her fixed costs for one year are $10,000 and her variable cost per unit is $.50. She’s done a competitor study and some other calculations and determined her unit price to be $6.00.

$10,000 / ($6 – $0.50) = 1,819 cupcakes that Beth must sell in one year to break even

The Limitations of a Break-Even Analysis

The most important thing to remember is that break-even analysis does not consider market demand. Knowing that you need to sell 500 units to break even does not tell you if or when you can sell those 500 units. Don’t let your passion for the business idea or new product cause you to lose sight of that basic truth.

On the flip side, you’ll need to decide how much effort and time you’re willing to expend to reach the break-even point. For example, are you willing to invest a substantial percentage of your sales team’s time and effort over several months to reach the break-even point? Or, is producing and selling something else a better and more profitable use of time and effort?

If you find demand for the product is soft, consider changing your pricing strategy to move product faster. However, discounted pricing can actually raise your break-even point. If you’re not careful, you’ll move product faster at the lower price but will incur more variable costs to produce more units in order to reach your break-even point.

Plan & Forecast More Accurately

How to Lower Your Break-Even Point

There are two basic ways to lower your break-even point: lower costs and raise prices. But neither should be done in a vacuum. Weigh your options carefully in pricing methods and consumer psychology to make sure you don’t sell more product but lose money in the bargain.

Further, consider all elements of costs, such as the associated quality and delivery, before slashing them to prevent damage to your brand. Outsourcing products or service can also reduce costs when demand or volume increase.

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How to Calculate Your Business’s Break Even Point [Video Included]

Published: August 07, 2019

You've heard the term "break even." It's a popular way to describe a time when you spent exactly as much money as you made. "We gambled $200 at the casino and won $200, so we broke even."

But in a business context, it's not that simple.

Your break even point doesn't just happen in Vegas, and needs to be constantly recalculated for you to turn a profit in the long term. Here's how to find it.

Find Your Contribution Margin

Recently, I explained how a business calculates its contribution margin -- the amount (ideally in the form of a percentage) that your revenue from sales exceeds your variable costs to develop the product. There are two reasons you should care about this figure.

First, your contribution margin deliberately leaves out your operating costs so you can see exactly how profitable your product is. For example, while software and website costs to an ecommerce clothing business don't directly contribute to the business's product (the clothing), the cost its thread vendor charges does. The business omits the first cost because it only wants to see how profitable its clothing is against what it pays to produce it.

The second reason contribution margin is so important? You need it to calculate your break even point .

Although operating costs are irrelevant when assessing a product's profitability, they're critical when assessing your business's profitability. These costs, also called fixed costs, factor back into your books when calculating your profit margin -- your total profitability after all business expenses paid. And in order to achieve a high profit margin, you first need to know when you'll break even.

Break Even Point

A business's break even point indicates when total revenue from sales will be equal to total costs to the business. As a formula, your break even point is your fixed costs divided by your contribution margin, and the final number can be used as a recurring metric by the business to predict profitability.

Keep in mind that a break even point isn't a finish line. Breaking even is an exciting milestone for a growing business, but the break even point indicates when the business's revenue will be equal to its costs -- not when it is. Businesses run the equation described above multiple times a year, eventually surpassing their break even point and (hopefully) becoming profitable.

So why is this number recalculated all the time? Once you "break even," aren't you officially on the road to profitability? Yes and no. If you were to calculate your break even point according to yearly revenue, yearly fixed costs, and yearly contribution margin, then yes, you'd get a number that is more representative of the business's profitability since you're considering a full year of activity. And once you break even, you wouldn't have to track your break even point as often.

But there are shorter-term break even points that reset on a weekly, monthly, or quarterly basis to guide you as you strive to reach your end-of-year (EOY) break even point.

For example, if fixed costs such as your monthly office rent total $3000, and your product has a contribution margin of $250 per unit, you'd have to sell 12 units of your product by the end of the month to break even for that month. See how I came up with this number below:

The following month, you're back to square one, as you're on the hook for $3000 worth of bills for next month and need to sell another 12 products to, once again, break even for that period of time.

Set Goals to Become Profitable

Luckily, as a business grows, it won't have to meet these incremental break even points in order to declare itself profitable by EOY. The business's monthly revenue can even come up short of a month's fixed costs, but break even or declare the business profitable at the end of the year.

How? With seasonal fluctuations in sales, you might fall short one month but become super busy during a holiday and make up for it. Perhaps you host a flash sale that reduces revenue in the short term but develops brand loyalty that brings in long-term customers, and a more steady revenue stream. Just be sure you calculate your break even point first before running a sale or discount so you can set appropriate goals for the sale itself. Houston, we have a profit.

Now it's time for you to calculate your business's break even point … How'd you do? Did you plug your sales figures into the formula above and get a scary number? Don't sweat it -- that's why these incremental break even points are so helpful to a growing business.

If you're discouraged by how much work you'd have to do to break even by the end of the year, shorten the time period of your break even point. By setting a goal to break even every week or month right now, you can set yourself up to break even after larger stretches of time later.  

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What is a break even analysis?

A break even analysis tells you how much you need to sell in order to cover your costs of doing business. A break even analysis is particularly useful if the products or services that you sell have costs associated with them, such as the costs of buying materials for your products. This is because every product you sell generates an additional cost - the cost of buying the materials for your product. So, the more you sell, the higher your expenses will be.

What do you need to know to calculate your break even point?

In order to calculate your break even point (the point where your sales cover all of your expenses), you will need to know three key numbers.

This is how much money you receive, on average, for every product or service that you sell. Be sure to count any discounts or special offers that you may give to your customers.

If you are building a break even analysis for your entire company and you sell multiple products or services, you will need to figure out the average selling price for all of your products or services, combined. Don’t worry, this is a pretty common scenario since most companies sell multiple products.

This is how much it costs you to deliver your product or service. If you are buying products and reselling them, this number is what you paid to purchase those products. If you are making your own products, your per-unit cost should include the costs of the materials it takes make your product. Typically, salaries are excluded from this number.

If you are selling services, this number is what it costs you to deliver your services. This might include the costs of paper or other materials you use when you are presenting to a client, or the cost of gas that it takes you to drive to a typical client.

In a text-book break even analysis, fixed costs would be defined as the expenses you have even if you don’t sell a single product. Those expenses might include things like rent and insurance. Instead of this text-book definition, we recommend using your regular running costs such as payroll and other normal expenses - what would normally be your “Operating Expenses” on a profit and loss statement.

Don’t worry about getting this exactly right. A good estimate is usually good enough.

Once you know these three numbers, you are ready to perform your break even calculation. Using the calculator above, plug in your numbers and see how many units (ie. products) you have to sell in a typical month to cover your costs. The calculator will also tell you the total revenue you will need to bring in to cover your fixed costs PLUS the costs of delivering your product or service.

Your break even point is where the line on the chart crosses the zero line.

If you have questions about calculating your break even point, please don’t hesitate to contact us on Facebook .

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Break-Even Point – What it is and How to Calculate it

Chris Leadley

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At some point you may decide to launch a new product, expand your product offering, hire new staff, or open a new business. Before you jump into it, you should learn to limit your risk.

A break-even analysis will help you achieve this as it shows you where your efforts will pay off; it gives insight, so you will know if investing your time and money into that idea is worth it.

With a break-even analysis, you will know if your efforts will profit you, or if you need to secure a loan to stay afloat before you start making profits.

Table of Contents

Meaning of break-even point

A break-even analysis is a useful calculation in finance that compares the expenses of a new product, service or business with the unit sell price to identify the break-even point.

In other words, it is an analysis that will show the number of sales required to cover the cost of running a business, or it shows the point where you will have made a lot of sales to cover all expenses to get your business running. At that break-even point, there is no profit made or money lost.

Important things to note

• A break-even analysis is a calculation that helps in identifying a business break-even point. Generally, lower fixed cost results in a lower break-even point.
• This financial analysis will tell you when you will get all the money you invested. At this point, you have not made profits or suffer losses.
• Anytime a business plans on adding costs, it uses a break-even analysis. Have at the back of your mind that this analysis does not take market demand into consideration.
• You can lower your break-even point in two ways: raise prices and lower costs.

How does it work

You use a break-even analysis to determine the break-even point of a business or company. This financial calculation is not a computation but an internal management tool that can be shared with outsiders like regulators or investors. Some financial institutions can also request this analysis as part of your financial projections when applying for a loan.

This financial calculation considers costs (both fixed and variable) relative to unit price and profit. Costs that do not change regardless of the products or services sold are known as fixed costs. Costs of equipment, salaries, rent or mortgage, insurance premiums, taxes on property, and interest paid on capital are examples of fixed costs.

Variable costs combine the costs of labour and material required to produce one unit of a product; this cost is influenced by changes in sales. Sales commissions, cost of labour payment, and expenses for raw materials, utilities, and shipping are examples of variable costs.

To calculate the total variable cost, the cost to produce one unit is multiplied by the number of units produced. For instance, if producing a unit costs £20, and you made 20 of them, the total variable cost is £400.

To calculate the contribution margin (sales price – variable costs), you will have to deduct the variable costs from the selling price of the product. So if you sell a product for £100 and the variable cost is £10, then the contribution margin is £90.

Note, the contribution margin contributes to balancing fixed costs. To get the average variable cost, you will have to divide the total variable cost by the number of units produced.

Generally, you get a lower break-even point from lower fixed costs, and that’s only possible when variable costs are lesser than sales revenue.

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Why do you need a break-even analysis for your business

There are so many ways a break-even analysis can prove useful.

It is a key element when you want to carry out financial projections for new products, product expansion, and start-ups. This analysis will provide information on the capital required to bring an idea to life, and if you will need to borrow funds to make that happen.

This analysis can be used for a variety of purposes, including:

• New product development:  Break-even analysis can help businesses determine the feasibility of a new product launch. By calculating the fixed and variable costs associated with the product, businesses can estimate how many units they need to sell in order to break even.
• Product expansion:  Break-even analysis can also be used to evaluate the potential profitability of expanding a product line. By comparing the fixed and variable costs of the new product to the fixed and variable costs of the existing product line, businesses can estimate how many units they need to sell in order to break even on the expansion.
• Start-ups:  Break-even analysis is essential for start-ups, as it can help them determine how much capital they need to raise in order to get started. By calculating the fixed and variable costs associated with the start-up, businesses can estimate how many units they need to sell in order to break even and become profitable.
• Risk management:  Break-even analysis can also be used to manage risks associated with various business decisions. For example, businesses can use break-even analysis to evaluate the risks involved in adding or deleting a product from their product mix, or in implementing new production processes.
• Budgeting:  Break-even analysis can also be used to budget for the addition of new staff. By calculating the fixed and variable costs associated with a new employee, businesses can estimate how many sales they need to generate in order to break even on the cost of the new employee.

Standard duration for a break-even analysis

A standard break-even time is between 6-18 months. If it will take a longer time to reach a break-even point, based on your calculation, then you may need to alter your plans to increase the price, reduce cost or do both. Any break-even point above 18 months is a strong risk indicator or signal.

When to use a break-even analysis

Businesses or companies make use of this tool when there are considerations to add costs. Additional costs may arise from deleting or adding products from the product mix, adding employees, adding locations, a merger or acquisition, or starting a new business. Simply put, a break-even analysis is a financial calculation that helps in determining the value and risk of any business, especially in any of these three events:

1. Business expansion

This analysis can provide information to CFOs or business owners on the duration required for an investment to generate profits. A good example is when you calculate the minimum sales needed to cover the expenses required to enter a new market or open a new location.

2. Lower price

When trying to outperform competitors, some businesses adopt the strategy of lowering prices. A break-even analysis is useful in this scenario as it helps to determine additional units to be sold to cover the reduction in price.

3. Narrowing business scenarios

There are many scenarios and uncertainty that makes it difficult when deciding on making changes to the business. With this analysis, the decision-making process can be reduced to yes/no questions.

How to calculate a break-even point

You can use accounting software to determine your break-even point, but it would be nice if you know how it is calculated. The formula for this is:

Break-even quantity = fixed cost / (sales price per unit – variable cost per unit)

Example to help you understand how it is calculated

John has been inspired to open a toy store. To know the number of toys he will have to sell to break even on his investment, he will have to do a break-even analysis.

From his calculation, his fixed cost for a year is £10,000 and £0.5 for variable cost per unit. From a competitor study and other calculations, he came up with £6 as his unit price. From the formula above, John’s BEP (break-even point) would be:

10,000 / (6-0.5) = 1,819. Thus, John would have to sell 1819 toys within a year to break even.

Break-even analysis limitations

This financial calculation doesn’t consider market demand, it’s very important you remember this. It does not tell if or when you can sell the units required to break even. In as much as you are inspired about a new product or business idea, try not to lose focus of that simple truth.

Another thing is that you need to make a decision on the time and effort you are willing to sacrifice or give to attain the break-even point.

For instance, are you ready to reach your break-even point by investing a huge percentage of time and effort from your sales team over several months? Or, is it better and more profitable to invest your time and effort in selling or producing something else?

To increase sales, you can decide to change your pricing strategy if you discover that the product demand is soft. Nevertheless, reducing your price can still increase your break-even point.

If care is not taken, your products will move faster at a low price and still sustain extra variable costs to produce more units to reach your break-even point.

Lowering your break-even point

You can lower your break-even point by raising prices and lowering costs. Do not make any hasty decisions when adopting any of these. Put serious thoughts into consumer psychology and pricing methods to avoid selling more products and still losing money in the end.

In addition, ensure you consider every element of costs (e.g., delivery and product quality) before you reduce your price to avoid damaging your brand. You can also outsource products or services to reduce cost when there is an increase in demand or volume.

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How to Calculate the Break-Even Point for Your New Business

As a small business owner, you are keenly aware of the importance of having a clear sense of financial positioning.

Understanding where you are financially helps you shape strategy, priorities, and operations.

One of the most essential financial calculations you should have at your fingertips is the break-even point. Based on your sales and expenses, the break-even point represents the moment when each additional sale generates a profit. As seen in the recent post,  Business Plan Calculators: The Quick Guide , there are excellent tools available to help you learn how to calculate the break-even point for your new business.

Using our step-by-step guide and one of the many small business plan calculators helps you  determine your break-even point .

Defining the Break-Even Point

Simply put, the break-even point is where total revenue is equal to total costs. It is the point a business has reached on a product or project where the sales volume has been sufficient to cover both fixed costs and variable costs. Your business is no longer spending more than it brings in, but it has not made any gains, either.

Knowing your break-even point helps you:

• Understand the number of units necessary to avoid losses.
• Forecast when the business first turns a profit.
• Gain a deeper understanding of fixed and variable costs and how to control them.
• Identify potential per-unit pricing changes.
• Assess the viability and risk of a new venture before launching. 

Before running a break-even point calculation, it is important to be clear on certain terms:

• Fixed costs:   These are expenses that are not affected by sales volume, such as rent, loan payments, marketing costs, and franchise fees. 
• Variable costs:   These costs are those that change with the number of sales made, such as materials and manufacturing expenses. 
• Contribution margin:   This is calculated by taking the selling price of a unit and subtracting the variable costs for that unit. For example, if your product sells for $500 and the costs of making the item are $300, your contribution margin is $200 per unit sold. You can use this margin to pay your fixed costs. Any money left over is your net profit. 
• Contribution margin ratio:   This is usually expressed as a percentage and is calculated by taking the contribution margin and subtracting revenue per unit.

To illustrate, consider a company that has the following figures:

• Fixed costs: $10,000 
• Variable costs per unit: $300 
• Selling price per unit: $500 
• Expected unit sales: 60

There are  two ways to calculate a break-even point  commonly used among businesses – using product units sold or sales dollars.  

To calculate the unit-based break-even point, use the following formula: 

Break-Even Point in Units = Fixed Costs ÷ (Selling Price Per Unit – Variable Costs Per Unit) 

Here is the calculation using our example figures: 

50 Units = $10,000 ÷ ($500-$300) 

If 60 units are sold, then the company would have a net profit of $2,000. 

The other method used is the revenue-based break-even point. It’s calculated by using this formula: 

Break-Even Point in Revenue = Fixed Costs ÷ Contribution Margin Ratio Contribution Margin = Price of Product – Variable Costs Contribution Margin Ratio = Contribution Margin (per unit) – Revenue (per unit) 

In our example, the contribution margin is $500 – $300 = $200. The contribution margin ratio is $200 ÷ $500 = 0.4 

The revenue break-even point is: 

$25,000 = $10,000 ÷ 0.4 

The company would need to generate $25,000 in sales to break even. 

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Home > Financial Projections > Break Even Point Analysis Formula

Break Even Point Analysis Formula

All businesses sell a product, generate revenue, pay direct costs, and hopefully make a gross margin on their product. Whether the business then earns a net income, makes a net loss or achieves a break even depends on whether the gross margin is large enough to cover all the operating expenses (fixed costs) of running the business. This is depicted in the simplified income statement below:

Consider now another example.

The business swings from profit to loss depending on whether the gross margin is greater or less than the operating expenses. There is a point then at which the gross margin equals the operating expenses of the business.

In this case, the gross margin of 55,000 is equal to the operating expenses of 55,000 and the business makes zero net income. At this point the business is said to break even, and the revenue of 100,000 is referred to as the break even revenue or break even sales.

A business is said to break even when the gross margin is equal to the operating expenses.

Using this we can say that a business will break even when

This gives us the break even point formula

How to Calculate Break Even Point

The historical financial statements of a business show the following information:

The business is making a loss and needs to know what the breakeven revenue is.

First we can calculate the gross margin %

Using this information the break even point formula can be used to find the breakeven revenue

The break even calculation shows that if the revenue is increased from 123,000 to 156,667, the business will break even and the income statement would be as follows:

Assuming the gross margin percentage remains steady at 60%, the business can now calculate its break even revenue at any level of operating costs. Suppose for example, the rent on the manufacturing premises is to be increased by 8,000.

The operating costs will now increase to 102,000 (94,000 + 8,000), and the break even revenue is given as follows:

The revenue needs to increase by 13,333 from 156,667 to 170,000 in order to cover the extra costs of the increased rent of 8,000. Notice that the same answer can be found by dividing the increase in operating costs by the gross margin %.

Break Even and the Financial Projections Template

The breakeven revenue is an important number to know as once a business has reached this level of revenue it will start to make a profit. After a period of time a business will normally stabilize to a steady break even figure. If the breakeven position is known then the management of a business can operate on a day to day basis by monitoring actual revenue against break even revenue.

The breakeven point can be calculated for projected figures, and is included in our financial projections template on the financial ratios page.

The breakeven point definition used in the financial projections template is as follows:

The breakeven revenue is therefore the revenue needed for the business to produce zero income before tax. In some circumstances it is useful to know the number of units required to breakeven and our post on break even units explains how to do this.

In addition, our breakeven calculator will calculate the breakeven revenue for up to four different scenarios by inserting values for unit selling price, cost price, and operating expenses.

About the Author

Chartered accountant Michael Brown is the founder and CEO of Plan Projections. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.

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