Calculate Break Even with Fixed and Variable Costs

What is Break Even?

The break even point is the level of sales at which total revenue equals total costs, resulting in neither profit nor loss. At this point, all costs (both fixed and variable) are covered by sales revenue.

For example, if your break even point is 1,000 units, selling 1,000 units means you've covered all your costs. Selling more than 1,000 units results in profit, while selling fewer means operating at a loss.

Fixed vs. Variable Costs

Fixed costs are expenses that remain constant regardless of production volume, such as rent, salaries, and insurance. Variable costs change with production volume, like raw materials and labor costs per unit.

Understanding the difference is crucial because variable costs increase with each unit sold, while fixed costs stay the same. This distinction affects how quickly a business reaches the break even point.

How to Calculate Break Even

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

Where:

• Fixed Costs - Total fixed costs (e.g., rent, salaries)
• Selling Price per Unit - Price at which each unit is sold
• Variable Cost per Unit - Cost to produce each unit

To find the break even point, divide the total fixed costs by the difference between the selling price per unit and the variable cost per unit.

Example Calculation

Let's say you have the following:

• Fixed Costs: $10,000
• Selling Price per Unit: $50
• Variable Cost per Unit: $20

The calculation would be:

This means you need to sell approximately 334 units to cover all costs and start making a profit.