Break Even Calculation Online

The break even point is the level of sales at which a business covers all its costs and starts making a profit. Understanding your break even point helps you determine how much revenue you need to generate to become profitable.

What is Break Even Point?

The break even point is the point at which total revenue equals total costs. At this point, a business neither makes a profit nor incurs a loss. It's a critical financial metric that helps businesses understand how much sales volume is needed to cover all expenses.

For example, if your fixed costs are $10,000 and your variable cost per unit is $10, then your break even point in units sold would be 1,000 units. This means you need to sell 1,000 units to cover all your costs.

How to Calculate Break Even

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

Identify your fixed costs (costs that don't change with production volume).
Determine your variable costs (costs that vary with production volume).
Calculate your contribution margin (selling price minus variable cost per unit).
Divide your total fixed costs by the contribution margin to find the break even point in units.

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

Break Even Formula

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

Break Even Point (Units) = Fixed Costs / Contribution Margin per Unit

Where Contribution Margin per Unit = Selling Price per Unit - Variable Cost per Unit

For sales dollars, use:

Break Even Point (Sales) = Fixed Costs / Contribution Margin Ratio

Where Contribution Margin Ratio = Contribution Margin per Unit / Selling Price per Unit

Worked Example

Let's say you have the following:

Fixed costs: $50,000
Variable cost per unit: $10
Selling price per unit: $20

First, calculate the contribution margin per unit:

Contribution Margin per Unit = $20 - $10 = $10

Next, calculate the break even point in units:

Break Even Point (Units) = $50,000 / $10 = 5,000 units

Finally, calculate the break even point in sales dollars:

Break Even Point (Sales) = 5,000 units × $20 = $100,000

This means you need to sell 5,000 units or generate $100,000 in sales to cover all your costs.

FAQ

What is the difference between fixed and variable costs?

Fixed costs are expenses that don't change with production volume, such as rent and salaries. Variable costs are expenses that vary with production volume, such as materials and labor.

How can I reduce my break even point?

You can reduce your break even point by increasing your selling price, reducing your variable costs, or reducing your fixed costs.

What if my variable cost is higher than my selling price?

If your variable cost is higher than your selling price, you won't be able to cover your variable costs, and your business won't be profitable.