Business Break-Even Point Definition and Calculator
Knowing your company’s break-even point
Break-even analysis is key to good business planning. It can also be helpful when you are trying to figure out if an idea is a good one or not. Basically, a break-even analysis lets you know how many units (pieces, hours, cartons) of product you must sell to cover your business costs.
You need three pieces of information:
• Fixed costs per month
• Variable costs per unit
• Average price per unit
Performing a Break-Even Analysis: Fixed Costs
Fixed costs include (expenses such as) rent and office payroll, which do not change much from month-to-month, no matter how much product you sell. Administrative and sales costs are usually considered fixed costs for this analysis.
The break-even point (BEP) is the point at which expenses (fixed and variable) equal revenue. The company pays all costs that need to be paid but the profit is zero.
For example, let’s say that you are a shampoo wholesaler and your variable cost per unit is $2.5, your average sales price is $5, and your fixed costs are $50,000.
Income = ($5-$2.5) *20,000 (units) = $50,000
Fixed Costs = $50000
If you sell 20,000 units your income equals your fixed costs.
After calculating your breakeven point you can realize that if your business sells fewer than 20,000 bottles of shampoo each month, it will make a loss; if it sells more, it will make a profit.
Then you need to determine if you can make and sell 20,000 bottles of shampoo per month. If you think that you cannot sell that many, you need to look at:
- Trying to reduce the fixed costs (move to smaller office space; tighten control of telephone bills, office supplies, etc.)
- Trying to reduce variable costs (find new shampoo supplier)
- Increasing the selling price of shampoos.
Any of these would reduce the break-even point. In other words, the business would not need to sell so many shampoos to make sure it could pay its fixed costs.
Here is a calculator for you to calculate your company’s break-even point.
Break-Even Point Calculator
Enter only numeric values (no commas), using decimal points where needed.
Non-numeric values will cause errors.
Author: Marc J Marin