2 Product Break Even Point Calculator

The break even point is the level of sales at which the total revenue equals the total costs. For businesses selling two products, calculating the combined break even point helps determine the optimal production and pricing strategy.

What is the Break Even Point?

The break even point is the sales volume at which a business's total revenue equals its total costs. At this point, the business neither makes a profit nor incurs a loss. For businesses selling two products, the break even point calculation becomes more complex as it requires considering the costs and revenues of both products.

Break Even Point Formula:

Break Even Point = Total Fixed Costs / (Price of Product A × Contribution Margin of Product A + Price of Product B × Contribution Margin of Product B)

Where:

Contribution Margin = Selling Price - Variable Cost per Unit
Total Fixed Costs = All fixed costs of the business

Understanding the break even point helps businesses determine the minimum sales volume needed to cover all costs and start making a profit. For businesses selling two products, this calculation becomes more complex as it requires considering the costs and revenues of both products.

How to Calculate Break Even for Two Products

Calculating the break even point for two products involves several steps. First, determine the fixed costs of the business. These are costs that do not change with the level of production, such as rent, salaries, and insurance. Next, calculate the variable costs for each product. These are costs that vary with the level of production, such as materials and labor.

Once you have the fixed and variable costs, you can calculate the contribution margin for each product. The contribution margin is the amount of revenue that remains after covering the variable costs. To calculate the contribution margin, subtract the variable cost per unit from the selling price per unit.

Finally, use the break even point formula to calculate the break even point for the two products. The formula for the break even point is:

Break Even Point Formula:

Break Even Point = Total Fixed Costs / (Price of Product A × Contribution Margin of Product A + Price of Product B × Contribution Margin of Product B)

This formula calculates the total number of units of both products that need to be sold to cover all fixed costs and break even.

Note: The break even point calculation assumes that the business sells both products at the same time. If the business sells the products at different times, the break even point calculation becomes more complex.

Worked Example

Let's consider a business that sells two products: Product A and Product B. The fixed costs of the business are $10,000. The variable cost per unit for Product A is $5, and the selling price per unit is $10. The variable cost per unit for Product B is $3, and the selling price per unit is $8.

First, calculate the contribution margin for each product:

Contribution Margin of Product A = $10 - $5 = $5
Contribution Margin of Product B = $8 - $3 = $5

Next, use the break even point formula to calculate the break even point for the two products:

Break Even Point:

$10,000 / ($10 × $5 + $8 × $5) = $10,000 / ($50 + $40) = $10,000 / $90 ≈ 111.11 units

This means that the business needs to sell approximately 111.11 units of both products combined to cover all fixed costs and break even.

FAQ

What is the difference between fixed and variable costs?

Fixed costs are expenses that do not change with the level of production, such as rent, salaries, and insurance. Variable costs are expenses that vary with the level of production, such as materials and labor.

How does the break even point calculation change if the business sells the products at different times?

If the business sells the products at different times, the break even point calculation becomes more complex. The business needs to consider the timing of the sales and the cash flows associated with each product.

What factors can affect the break even point?

Several factors can affect the break even point, including changes in fixed costs, changes in variable costs, changes in selling prices, and changes in the level of production.

How can businesses use the break even point calculation to make decisions?

Businesses can use the break even point calculation to make decisions about pricing, production, and marketing. For example, businesses can use the break even point calculation to determine the optimal price for a product or the optimal level of production.