The break-even point is defined as a limit when the overall costs and total revenue are equal. In simple terms, when the business is neither making a profit nor a loss, it is called a break-even point.
A break-even analysis is a tool that helps entrepreneurs to determine the profitability of a company.
How to Calculate Break Even?
Break Even Point = Fixed costs/(Sales Price Per Unit – Variable Cost Per Unit Sale)
Below is a breakdown of formula terms:
- Fixed Costs may include labor costs, salaries, taxes, or utility bills.
- Variable costs may include raw materials or commissions.
- Variable Cost Per Unit can be calculated by dividing the sum of all sales by the total variable costs in a given month.
- Sales Price Per Unit is the amount you sell each product or service for
Once you have entered the desired numbers in the formula, the result will define your breakeven number. This number will show the number of sales you need to make to make a profit (to do this yourself, scroll down to our calculator).
You face a loss if your company’s sales fall short of the break-even point. However, you make a profit if your sales are more than your breakeven point.
Example of the Calculation of Breakeven
For instance, Nestle is planning to produce more cans of juices and the cost for the production is as follows:
Fixed Costs = $2,000 per month
Variable Costs = 0.40 per can produced
Sales Price = $1.50 per can
Breakeven = $2000/($1.50 – $.40)
=1818 units
This reinstates that the company must sell 1,800 units per month to reach break-even so that the company doesn’t lose money.
Breakeven Point Calculator
This above number indicates the number of sales a person needs to make a profit in his/her company.
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Why Do Businesses Need to Calculate Breakeven?
Business owners use break-even as the number of sales they must achieve to fully recoup their expenses.
Following are some of the reasons why business owners need to calculate break-even:
- Predict Cost: To determine how much they need to sell in order to cover their costs and start making a profit.
- Evaluate Targets: To set sales goals and make pricing and production decisions.
- Optimize Operations: To identify their fixed and variable costs which can help them optimize their operations to increase profitability.
The breakeven point is often used as part of a greater budgeting, forecasting, and/or investment strategy.
Limitations of Breakeven
Below are some of the limitations of the break-even point:
- It doesn’t cater to market demand.
- The breakeven point assumes that whatever products you have made are sold.
- It ignores the variability of other factors and is a static model.
- Results are highly dependent upon the data provided
Remember that the breakeven point is just one tool for budgeting and forecasting your business.
Conclusion
Breakeven informs you if the project is worth pursuing at all, or if you’ll need to borrow money to keep your business running until you can start generating profits.
Additionally, you can consider keeping a track of your break-even point to deal with cost management, budgeting, and pricing plans.
