Bankrate Break Even Calculator

Understanding your business's break even point is crucial for financial planning. The break even point is the level of sales at which your total revenue equals your total costs, meaning you're neither making a profit nor incurring a loss. This calculator helps you determine that critical point using your fixed and variable costs.

What is Break Even?

The break even point is the sales volume at which a business's total revenue equals its total costs. At this point, the company neither makes a profit nor incurs a loss. Understanding your break even point helps you assess your business's financial health and make informed decisions about pricing, production, and sales strategies.

There are two main types of costs that affect your break even point: fixed costs and variable costs.

Fixed Costs are expenses that do not change with the level of production or sales, such as rent, salaries, and insurance. Variable Costs are expenses that vary directly with the level of production or sales, such as raw materials and direct labor.

How to Calculate Break Even

Calculating your break even point involves determining your fixed costs, variable costs per unit, and selling price per unit. Here's a step-by-step guide:

Calculate your total fixed costs (FC). These are expenses that remain constant regardless of production volume.
Determine your variable cost per unit (VC). This is the cost to produce one unit of your product.
Identify your selling price per unit (P). This is the price at which you sell each unit of your product.
Use the break even formula to calculate the break even point in units (BE).

Once you have the break even point in units, you can calculate the break even sales revenue by multiplying the break even units by the selling price per unit.

Break Even Formula

The break even point in units can be calculated using the following formula:

BE = FC / (P - VC)

Where:

BE = Break even point in units
FC = Total fixed costs
P = Selling price per unit
VC = Variable cost per unit

To find the break even sales revenue, multiply the break even units by the selling price per unit:

Break Even Revenue = BE × P

Worked Example

Let's walk through a practical example to illustrate how to calculate the break even point.

Example Scenario

Suppose you run a small business selling custom furniture. Here are the details:

Total fixed costs (FC): $10,000 per month
Variable cost per unit (VC): $50
Selling price per unit (P): $150

Using the break even formula:

BE = $10,000 / ($150 - $50) = $10,000 / $100 = 100 units

This means you need to sell 100 units of furniture to break even. To find the break even sales revenue:

Break Even Revenue = 100 × $150 = $15,000

So, you need to generate $15,000 in sales revenue to cover your fixed and variable costs.

Interpreting Results

Understanding the results from your break even calculation can help you make informed business decisions. Here are some key points to consider:

Profit Potential: Sales above the break even point generate profits. Each additional unit sold contributes to your bottom line.
Cost Control: Reducing variable costs or increasing selling prices can lower your break even point, making it easier to achieve profitability.
Financial Planning: Use the break even analysis to set realistic sales targets and financial goals.

Regularly reviewing your break even point helps you assess your business's financial health and make strategic adjustments to improve profitability.

FAQ

What is the difference between fixed and variable costs?

Fixed costs are expenses that remain constant regardless of production volume, such as rent and salaries. Variable costs vary directly with the level of production or sales, such as raw materials and direct labor.

How can I lower my break even point?

You can lower your break even point by reducing fixed costs, decreasing variable costs, or increasing your selling price. These adjustments can make it easier to achieve profitability.

Is the break even point the same as the profit point?

No, the break even point is where total revenue equals total costs, resulting in neither profit nor loss. The profit point is where total revenue exceeds total costs, generating a profit.

How often should I review my break even analysis?

It's a good practice to review your break even analysis at least quarterly or whenever there are significant changes in your business, such as cost increases or price changes.