What is the Break-Even Point Formula and how to calculate it?

Break Even Point Formula is a business tool that calculates the number of units needed to be sold/purchased or generated/incurred, based on fixed costs and variable costs, for covering fixed and contribution (to cover all expenses). It also helps in calculating the point at which no profit is made, and no loss incurred.

How to calculate Break Even Point Formula?

Break Even Point Calculation formula is given by:

X = Fixed Costs/Contribution Margin Ratio (where, X is the number of units)

Fixed Costs + Variable Costs = Total Unit Cost (where,  Y is the number of Units)

Sales Price per Unit – Total Unit Cost = Profit Margin (per unit)

From the equation, it is clear that to calculate break-even point, you need to know two things: the fixed costs and the contribution margin ratio. Once you have these two figures, you can use the equation to determine how many units need to be sold in order to break even.

Let’s take an example:

Suppose a company has monthly fixed costs of $1,000 and a contribution margin ratio of 45%. Now, to calculate the break-even point (in units) we plug these two numbers into our equation as follows:

X = 1000/45%  = 2000

The company would need to sell 2000 units in order to break even. If they sell more than 2000 units, they will make a profit; if they sell fewer than 2000 units, they will incur a loss.

It’s important to note that the break-even point calculation can be used for either products or services. It can also be used for a single product or service, as well as for multiple products and services.

For those of you who want to calculate break-even point using their current monthly fixed and variable cost, here is an alternative equation: X = (Fixed Costs * Contribution Margin Ratio) + Variable Costs. This way, the contribution margin ratio has already been factored into the equation, which would be more convenient for quick calculations.

The break-even point can be calculated manually or with the Break-Even Point Calculator.

Break Even Point Formula Examples

1)  A company has monthly fixed costs of $20,000 and a contribution margin ratio of 40%. How many units does the company need to sell in order to break even?

X = (20000*40%) + Variable Costs

X = 16000 + Variable Costs

Variable Costs = 4000

So, the company would need to sell 16,000 units in order to break even.

2) A company has a single product with a sales price of $10 and variable costs of $8. What is the break-even point in units?

X = Fixed Costs/Contribution Margin Ratio

X = 8000/50%

X = 16000

The company would need to sell 16,000 units in order to break even.

3) A company offers two services, A and B. Service A has a contribution margin ratio of 60%, while service B has a contribution margin ratio of 45%. What is the break-even point for the company if total monthly fixed costs are $10,000?

X = (10000*60%) + (10000*45%)

X = 36000 + 4500

X = 41,500

So the company would need to sell 41,500 units in order to break even. If they sold more than this number of units (totaling at least $41,500), they would make a profit; if they sold fewer units, they would incur a loss.

4) A company has monthly fixed costs of $10,000 and a contribution margin ratio of 50%. How many units does the company need to sell in order to have a profit of $3,000?

So, the company would need to sell 13500 units in order to have a profit of $3000.

5) A company has a single product with a sales price of $10 and variable costs of $8. What is the break-even point in dollars?

break even point = (fixed costs*contribution margin ratio) + variable costs

break even point = 10000*50% + 80000

break even point = 40000 + 80000

break even point = 120000

The company would need to sell $120000 worth of product in order to break even. Conversely, if the company sells for less than $120000, it incurs a loss.

Now that you understand how to calculate your business’ break-even point, you can use this number to help you in your day-to-day operations.

The break-even point can also be used in budgeting and forecasting, as it is a helpful tool for determining future sales volumes and making investments. This concept can also be applied to individual products or services as well as multiple products and services. A company could use the break-even point to help forecast sales and revenue projections.

Businesses can use the break-even point calculation as a tool to determine whether an activity or product is worth pursuing, especially if the company is operating at a loss. It might not be possible to continue investing time or resources into an unprofitable venture or product that requires further investment. However, it could be worthwhile for a company to continue its efforts if the venture or product contributes to the bottom line at least in some capacity.

If your business is close to reaching its break-even point and you anticipate that you might not be able to reach optimum efficiency due to lack of resources and capital, consider waiting until profitability to expand your company.

If you are operating above your break-even point, consider cutting costs to improve overall efficiency. For example, if your monthly fixed costs are $10,000 and you’re making a profit of $3000 per month, try cutting costs by at least the amount of money you are making in order to stay afloat.

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