How to Calculate Break Even Amount

The break even point is the level of sales or production where total revenue equals total costs. Calculating this helps businesses determine when they stop losing money and start making a profit. This guide explains the formula, assumptions, and practical applications of break even analysis.

What is Break Even Point?

The break even point (BEP) is the point at which a business's total revenue equals its total costs. At this point, the business neither makes a profit nor incurs a loss. Understanding the break even point helps businesses plan production, pricing, and marketing strategies.

Key concepts in break even analysis include:

Fixed costs - Costs that do not change with production volume (rent, salaries, equipment)
Variable costs - Costs that vary directly with production (materials, labor, packaging)
Contribution margin - Revenue minus variable costs per unit

Break Even Formula

The standard break even formula is:

Break Even Quantity = Fixed Costs / Contribution Margin per Unit

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

For monetary break even (in dollars), use:

Break Even Revenue = Fixed Costs / (1 - (Variable Cost per Unit / Selling Price per Unit))

This formula assumes all units produced are sold at the same price.

How to Calculate Break Even

Step-by-Step Calculation

Identify your fixed costs (FC)
Determine your variable cost per unit (VC)
Decide on your selling price per unit (SP)
Calculate contribution margin per unit: CM = SP - VC
Calculate break even quantity: BEQ = FC / CM
Calculate break even revenue: BER = BEQ × SP

Note: The break even point assumes all units produced are sold. In reality, businesses may have unsold inventory or other factors affecting actual break even.

Worked Example

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

Fixed costs: $50,000
Variable cost per unit: $20
Selling price per unit: $30

Step 1: Calculate Contribution Margin

CM = SP - VC = $30 - $20 = $10 per unit

Step 2: Calculate Break Even Quantity

BEQ = FC / CM = $50,000 / $10 = 5,000 units

Step 3: Calculate Break Even Revenue

BER = BEQ × SP = 5,000 × $30 = $150,000

This means the company needs to sell 5,000 units or $150,000 in revenue to cover its costs and break even.

FAQ

What is the difference between break even quantity and break even revenue?: Break even quantity is the number of units you need to sell to cover costs, while break even revenue is the total sales amount needed to cover costs.
How does pricing affect the break even point?: Higher selling prices increase the contribution margin, which lowers the break even quantity. Conversely, lower prices increase the break even quantity.
What if my business has seasonal sales patterns?: For businesses with seasonal sales, you may need to calculate a monthly or quarterly break even point rather than an overall annual break even.
Can the break even point be negative?: No, the break even point is calculated based on actual costs and prices, so it cannot be negative. If your calculation results in a negative number, you may have entered incorrect values for fixed costs, variable costs, or selling price.