Break Even Point BEP Formula + Calculator Finally, the breakeven point can be used to determine the amount of losses that could be sustained if the business suffers a sales downturn. This BEP analysis helps in determining the number of units or revenue needed to cover the total costs. Calculating the breakeven point is a key financial analysis tool used by business owners. Once you know the fixed and variable costs for the product your business produces or a good approximation of them, you can use that information to calculate your company’s breakeven point. Small business owners can use the calculation to determine how many product units they need to sell at a given price point to break even. In the first calculation, divide the total fixed costs by the unit contribution margin. 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. The breakeven point doesn’t typically factor in commission costs, although these fees could be included if desired. The break-even points (A,B,C) are the points of intersection between the total cost curve (TC) and a total revenue curve (R1, R2, or R3). The break-even quantity at each selling price can be read off the horizontal axis and the break-even price at each selling price can be read off the vertical axis. The total cost, total revenue, and fixed cost curves can each be constructed with simple formula. What we mean here by BEP is the number of units that must be sold to just cover fixed costs so you would need to specify the revenue and variable costs per unit in order to know the BEP for fixed costs of 8000. The total fixed costs, variable costs, unit or service sales are calculated on a monthly basis in this calculator. The break-even point allows a company to know when it, or one of its products, will start to be profitable. In the example of XYZ Corporation, you might not sell the 50,000 units necessary to break even. • Pricing a product, the costs incurred in a business, and sales volume are interrelated. In cases where the production line falters, or a part create an employee advance of the assembly line breaks down, the break-even point increases since the target number of units is not produced within the desired time frame. Equipment failures also mean higher operational costs and, therefore, a higher break-even. The break-even value is not a generic value as such and will vary dependent on the individual business. However, it is important that each business develop a break-even point calculation, as this will enable them to see the number of units they need to sell to cover their variable costs. Each sale will also make a contribution to the payment of fixed costs as well. The break-even point (BEP) in economics, business—and specifically cost accounting—is the point at which total cost and total revenue are equal, i.e. “even”. There is no net loss or gain, and one has “broken even”, though opportunity costs have been paid and capital has received the risk-adjusted, expected return. In short, all costs that must be paid are paid, and there is neither profit nor loss.[1][2] The break-even analysis was developed by Karl Bücher and Johann Friedrich Schär. Calculating the Break-Even Point in Sales Dollars You would not be able to calculate the break-even quantity of units unless you have revenue and variable cost per unit. 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. At the break-even point, the total cost and selling price are equal, and the firm neither gains nor losses. Another limitation is that Break-even analysis makes some oversimplified assumptions about the relationships between costs, revenue, and production levels. For example, it assumes that there is a linear relationship between costs and production. Try Shopify for free, and explore all the tools and services you need to start, run, and grow your business. Break-even (or break even), often abbreviated as B/E in finance, (sometimes called point of equilibrium) is the point of balance making neither a profit nor a loss. Any number below the break-even point constitutes a loss while any number above it shows a profit. The term originates in finance but the concept has been applied in other fields. The incremental revenue beyond the break-even point (BEP) contributes toward the accumulation of more profits for the company. 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. Break-even analysis in economics, business, and cost accounting refers to the point at which total costs and total revenue are equal. A break-even point analysis is used to determine the number of units or dollars of revenue needed to cover total costs (fixed and variable costs). The total fixed costs are $50k, and the contribution margin ($) is the difference between the selling price per unit and the variable cost per unit. The analysis seeks to identify how much in sales will be required to cover all fixed costs so that the business can begin generating a profit. With a contribution margin of $40, the break-even point is 500 units ($20,000 divided by $40). In the formula for determining a breakeven by total sales dollars, the denominator is called the contribution margin ratio, which is the contribution margin divided by the unit sale price. In energy, the break-even point is the point where usable energy gotten from a process equals the input energy. Therefore, the break-even point in sales dollars is $50,000 ($20,000 total fixed costs divided by 40%). If the same cost data are available as in the example on the algebraic method, then the contribution is the same (i.e., $16). Using the algebraic method, we can also identify the break-even point in unit or dollar terms, as illustrated below. In the meantime, start building your store with a free 3-day trial of Shopify. In this article, we’ll explain what a breakeven point is and how to calculate it. This break-even analysis is based on the foundation of a single product or service. What is your current financial priority? Upon doing so, the number of units sold cell changes to 5,000, and our net profit is equal to zero, as shown below in the screenshot of the finished solution. It is only useful for determining whether a company is making a profit or not at a given point in time. Sales below the break-even point mean a loss, while any sales made above the break-even point lead to profits. The analysis shows that the competitor has an inordinately high breakeven point that allows for little profit, if any. Calculations for Break-Even Analysis It may help owners decide whether to raise prices, cut costs, expand, or seek a loan or new investors. The break-even point is the number of units that you must sell in order to make a profit of zero. You can use this calculator to determine the number of units required to break even. Start your 3-day free trial today! That allows the put buyer to sell 100 shares of Meta stock (META) at $180 per share until the option’s expiration date. If the stock is trading above that price, then the benefit of the option has not exceeded its cost. The calculation is useful when trading in or creating a strategy to buy options or a fixed-income security product. Break-even analysis is the effort of comparing income from sales to the fixed costs of doing business. It is only possible for a firm to pass the break-even point if the dollar value of sales is higher than the variable cost per unit. This means that the selling price of the goods must be higher than what the company paid for the good or its components for them to cover the initial price they paid (variable and fixed costs). Once they surpass the break-even price, the company can start making a profit. Revenue represents total income generated from the sale of goods or services by an individual or business. Methods to Calculate Break-Even Point Otherwise, the business will need to wind-down since the current business model is not sustainable. Ask a question about your financial situation providing as much detail as possible. This team of experts helps Finance Strategists maintain the highest level of accuracy and professionalism possible. The articles and research support materials available on this site are educational and are not intended to be investment or tax advice. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Sometimes determining whether a cost is fixed or variable is more complicated. With NetSuite, you go live in a predictable timeframe — smart, stepped implementations begin with sales and span the entire customer lifecycle, so there’s continuity from sales to services to support. The break-even point is an important financial metric, which helps to analyze business and its viability. It definitely helps in lowering risks, setting price and targets, helps with additional funding, but for the long-term, it cannot be the only one tool to judge the financial health of any business. • A company’s breakeven point is the point at which its sales exactly cover its expenses. In effect, the analysis enables setting more concrete sales goals as you have a specific number to target in mind. Let’s say that we have a company that sells products priced at $20.00 per unit, so revenue will be equal to the number of units sold multiplied by the $20.00 price tag. 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. Also, by understanding the contribution margin, businesses can make informed decisions about the pricing of their products and their levels of production. Businesses can even develop cost management strategies to improve efficiencies. Businesses can calculate breakeven points either in terms of the total dollar amount of sales or by the number of products, called unit sales. Remember the break-even point is used as an estimate for lender viability and your business plan. There is also a category of costs that falls in between, known as semi-variable costs (also known as semi-fixed costs or mixed costs). These are costs composed of a mixture of both fixed and variable components. For example, a business that sells tables needs to make annual sales of 200 tables to break-even. At present the company is selling fewer than 200 tables and is therefore operating at a loss. As a business, they must consider increasing the number of tables they sell annually in order to make enough money to pay fixed and variable costs.
