How to Calculate Break Even Number

Calculating the break even number is essential for businesses to determine the point at which total revenue equals total costs. This guide explains the break even formula, how to calculate it, and what the results mean.

What is Break Even Number?

The break even number (or break even point) 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 number helps businesses plan production levels, pricing strategies, and financial projections.

Key factors that affect the break even number include fixed costs, variable costs, and selling price. Fixed costs remain constant regardless of production volume, while variable costs change with production. The selling price is the amount a business charges for its product or service.

Break Even Formula

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

Break Even Formula

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

Where:

Fixed Costs - Costs that do not change with production volume (e.g., rent, salaries)
Selling Price per Unit - Price at which each unit is sold
Variable Cost per Unit - Costs that vary with production volume (e.g., materials, labor)

Important Note

The selling price per unit must be greater than the variable cost per unit for the break even number to be positive. If the selling price is less than or equal to the variable cost, the business will never break even.

How to Calculate Break Even

To calculate the break even number, follow these steps:

Identify your fixed costs (e.g., rent, salaries, utilities)
Determine your variable costs per unit (e.g., materials, labor)
Decide on your selling price per unit
Apply the break even formula: Break Even Number = Fixed Costs / (Selling Price per Unit - Variable Cost per Unit)
Interpret the result to understand how many units you need to sell to break even

Using our interactive calculator above, you can quickly compute the break even number by entering your fixed costs, variable costs, and selling price.

Worked Example

Let's calculate the break even number for a business with the following details:

Fixed Costs	Variable Cost per Unit	Selling Price per Unit
$10,000	$5	$10

Using the break even formula:

Calculation

Break Even Number = $10,000 / ($10 - $5) = $10,000 / $5 = 2,000 units

This means the business needs to sell 2,000 units to break even. Selling more than 2,000 units will result in a profit, while selling fewer will result in a loss.

Interpreting Results

The break even number provides several important insights:

Production Planning - Helps determine the minimum number of units to produce to cover costs
Pricing Strategy - Shows the impact of price changes on profitability
Financial Projections - Assists in setting realistic sales targets
Risk Assessment - Identifies the point at which further investment becomes profitable

Businesses should regularly review their break even number as market conditions, costs, and prices change over time.

FAQ

What is the difference between break even point and break even number?

The terms are often used interchangeably. The "break even point" typically refers to the point in time or production volume, while the "break even number" refers to the specific quantity or amount needed to reach that point.

Can the break even number be negative?

No, the break even number cannot be negative. A negative result indicates that the selling price is less than or equal to the variable cost, meaning the business will never break even.

How does the break even number change with price increases?

Increasing the selling price decreases the break even number, meaning the business can break even with fewer units sold. Conversely, decreasing the selling price increases the break even number.