BREAK EVEN POINT
The break-even point is the point where a company’s revenues equals its costs. The calculation for the break-even point can be done one of two ways; one is to determine the amount of units that need to be sold, or the second is the amount of sales, in dollars, that need to happen.
The break-even point allows a company to know when it, or one of its products, will start to be profitable. If a business’s revenue is below the break-even point, then the company is operating at a loss. If it’s above, then it’s operating at a profit.
Calculate Break Even Point
FIXED COSTS ÷ (SALES PRICE PER UNIT – VARIABLE COSTS PER UNIT)
Fixed Costs – Fixed costs are ones that typically do not change, or change only slightly. Examples of fixed costs for a business are monthly utility expenses and rent.
Sales Price per Unit- This is how much a company is going to charge consumers for just one of the products that the calculation is being done for.
Variable Costs per Unit- Variable costs are costs directly tied to the production of a product, like labor hired to make that product, or materials used. Variable costs often fluctuate, and are typically a company’s largest expense.
The calculation is as follows:
Total variable costs ÷ Total units produced
Breakeven analysis is useful for the following reasons:
- It helps to determine remaining/unused capacity of the company once the breakeven is reached. This will help to show the maximum profit on a particular product/service that can be generated.
- It helps to determine the impact on profit on changing to automation from manual (a fixed cost replaces a variable cost).
- It helps to determine the change in profits if the price of a product is altered.
- It helps to determine the amount of losses that could be sustained if there is a sales downturn.
