How to Calculate Accounting Break Even Point

The accounting break even point is the level of sales revenue needed to cover all costs (both fixed and variable) and achieve zero profit. Understanding this concept helps businesses determine how many units must be sold to start making a profit.

What is the Accounting Break Even Point?

The accounting break even point is a financial metric that shows the point at which total revenue equals total costs, resulting in zero profit. It's a key concept in cost-volume-profit analysis that helps businesses understand their financial performance and make strategic decisions.

There are two main types of break even points:

Accounting Break Even Point: Based on total costs (fixed + variable) and total revenue.
Financial Break Even Point: Based on operating income (revenue minus operating expenses) and fixed costs.

This guide focuses on the accounting break even point, which is more commonly used in business planning and financial analysis.

Break Even Formula

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

Break Even Point (Units) = Fixed Costs / (Selling Price per Unit - Variable Cost per Unit)

Where:

Fixed Costs are expenses that do not change with production volume (rent, salaries, insurance).
Selling Price per Unit is the price at which each unit is sold.
Variable Cost per Unit are costs that vary directly with production volume (materials, labor).

To find the break even point in dollars, multiply the break even units by the selling price per unit.

How to Calculate Break Even Point

Calculating the break even point involves these steps:

Identify all fixed costs for your business.
Determine the variable cost per unit.
Know your selling price per unit.
Apply the formula: Break Even Point = Fixed Costs / (Selling Price - Variable Cost).
Calculate the break even point in dollars by multiplying the break even units by the selling price.

Note: The break even point assumes all costs are covered and no profit is made until sales exceed this point.

Worked Example

Let's calculate the break even point for a small manufacturing company:

Item	Amount
Fixed Costs	$50,000
Variable Cost per Unit	$10
Selling Price per Unit	$20

Using the formula:

Break Even Point (Units) = $50,000 / ($20 - $10) = $50,000 / $10 = 5,000 units

In dollars:

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

This means the company needs to sell 5,000 units or $100,000 in revenue to cover all costs and start making a profit.

Interpreting Results

Understanding the break even point helps businesses make informed decisions:

If sales are below the break even point, the business is operating at a loss.
If sales exceed the break even point, the business starts making a profit.
The break even point helps determine pricing strategies and production levels.
It's a key metric for budgeting and financial planning.

Businesses often use the break even point to:

Set realistic sales targets
Determine pricing strategies
Plan production levels
Evaluate cost control measures

FAQ

What is the difference between accounting and financial break even point?: The accounting break even point considers all costs (fixed and variable) and total revenue. The financial break even point only considers operating income and fixed costs, excluding non-operating expenses.
How does the break even point change with price changes?: Increasing the selling price per unit decreases the break even point, while decreasing the selling price increases it. This is because a higher price means each unit contributes more to covering fixed costs.
Can the break even point be negative?: No, the break even point cannot be negative. If the selling price is less than or equal to the variable cost per unit, the denominator in the formula becomes zero or negative, making the calculation impossible.
How does the break even point relate to profit?: The break even point is the point where total revenue equals total costs. Profit is calculated as total revenue minus total costs, so profit only exists when sales exceed the break even point.