Break-Even Analysis: Formula and Calculation

Again, looking at the graph for break-even (Figure 3.8), you will see that their sales have moved them beyond the point where total revenue is equal to total cost and into the profit area of the graph. 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. The break-even point (BEP) is the amount of product or service sales a business needs to make to begin earning more than you spend. You measure the break-even point in units of product or sales of services. At that breakeven price, the homeowner would exactly break even, neither making nor losing any money.

The first step in determining the viability of the business decision to sell a product or provide a service is analyzing the true cost of the product or service and the timeline of payment for the product or service. Ethical managers need an estimate of a product or service’s cost and related revenue streams to evaluate the chance of reaching the break-even point. As we can see from the sensitivity table, the company operates at a loss until it begins to sell products in quantities in excess of 5k. For instance, if the company sells 5.5k products, its net profit is $5k. After entering the end result being solved for (i.e., the net profit of zero), the tool determines the value of the variable (i.e., the number of units that must be sold) that makes the equation true. In effect, the insights derived from performing break-even analysis enables a company’s management team to set more concrete sales goals since a specific number to target was determined.

In contrast to fixed costs, variable costs increase (or decrease) based on the number of units sold. If customer demand and sales are higher for the company in a certain period, its variable costs will also move in the same direction and increase (and vice versa). To find your variable costs per unit, start by finding your total cost of goods sold in a month. If you have any other costs tied to the products you sell—like payments to a contractor to complete a job—add them to your cost of goods sold to find your total variable costs.

Hicks Manufacturing can use the information from these different scenarios to inform many of their decisions about operations, such as sales goals. For more cost cutting ideas, check out our guide of 25 ways to cut costs. By looking at each component individually, you can start to ask yourself critical questions about your pricing and costs. If you’re having trouble hitting your break-even point or it seems unreachable, it’s time to make a change.

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 aurora bookkeeping teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem. In conclusion, just like the output for the goal seek approach in Excel, the implied units needed to be sold for the company to break even come out to 5k. The incremental revenue beyond the break-even point (BEP) contributes toward the accumulation of more profits for the company. 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”).

Break Even Point Calculation Example (BEP)

It also assumes that there is a linear relationship between costs and production. Break-even analysis ignores external factors such as competition, market demand, and changes in consumer preferences. Upon selling 500 units, the payment of all fixed costs is complete, and the company will report a net profit or loss of $0. To find the total units required to break even, divide the total fixed costs by the unit contribution margin.

Why You Can Trust Finance Strategists

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. For a coffee shop, the variable costs would be the beans, cups, sleeves, and labor used to produce one cup of coffee. As you can see, the Barbara’s factory will have to sell at least 2,500 units in order to cover it’s fixed and variable costs. Anything it sells after the 2,500 mark will go straight to the CM since the fixed costs are already covered. The purpose of the break-even analysis formula is to calculate the amount of sales that equates revenues to expenses and the amount of excess revenues, also known as profits, after the fixed and variable costs are met.

There is no net loss or gain at the break-even point (BEP), but the company is now operating at a profit from that point onward. 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. Watch this video of an example of performing the first steps of cost-volume-profit analysis to learn more.

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1. This makes it almost impossible to always have a most up-to-date, accurate breakeven point.
2. Your fixed costs (or fixed expenses) are the expenses that don’t change with your sales volume.
3. He wants to know what kind of impact this new drink will have on the company’s finances.
4. Break-even analysis compares income from sales to the fixed costs of doing business.
5. 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.
6. It’s also important to keep in mind that all of these models reflect non-cash expense like depreciation.

Stock Market Breakeven Points

Now we can take this concept a step further and compute the total number of units that need to be sold in order to achieve a certain level profitability with out break-even calculator. This $40 reflects the revenue collected to cover the remaining fixed costs, which are excluded when figuring the contribution margin. This point is also known as the minimum point of production when total costs are recovered. At the break-even point, the total cost and selling price are equal, and the firm neither gains nor losses.