Break-Even Analysis: Formula and Calculation

The selling price is $15 per pizza, and the monthly sales are 1,500 pizzas. Profitability may be increased when a business opts for outsourcing, which can help reduce manufacturing costs when production volume increases. In cases where the production line falters, or a part of the assembly line breaks down, the break-even point increases since the target number of units is not produced within the desired time frame. Equipment failures also mean higher operational costs and, therefore, a higher break-even.

How to Conduct Break-Even Analysis

The calculation is useful when trading in or creating a strategy to buy options or a fixed-income security product. Assume that an investor pays a $5 premium for an Apple stock (AAPL) call aipb certification test option with a $170 strike price. This means that the investor has the right to buy 100 shares of Apple at $170 per share at any time before the options expire.

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We provide simple, predictable pricing to keep your break-even point analysis accurate and up to date. With monthly caps, flat pricing, and flexible solutions, you always know what you’ll pay. Shaun Conrad is a Certified Public Accountant and CPA exam expert with a passion for teaching. After almost a decade of experience in public accounting, he created MyAccountingCourse.com to help people learn accounting & finance, pass the CPA exam, and start their career. Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance.

Break-even analysis, or the comparison of sales to fixed costs, is a tool used by businesses and stock and option traders. It is essential in determining the minimum sales volume required to cover total costs and break even. If the company can increase its contribution margin per unit to $8 (by perhaps lowering its per unit variable cost), it only needs to sell 8,750 ($70,000 / $8) to break even.

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It is also helpful to note that the sales price per unit minus variable cost per unit is the contribution margin per unit. For example, if a book’s selling price is $100 and its variable costs are $5 to make the book, $95 is the contribution margin per unit and contributes to offsetting the fixed costs. The break-even point formula is calculated by dividing the total fixed costs of production by the price per unit less the variable costs to produce the product. Another limitation is that the breakeven point assumes that sales prices, variable costs per unit, and total fixed costs remain constant, which is often not the case. The price of goods sold at fluctuates, and the cost of raw materials may hardly stay stable. In addition, changes to the relevant range may change, meaning fixed costs can even change.

It is also possible to calculate how many units need to be sold to cover the fixed costs, which will result in the company breaking even. To do this, calculate the contribution margin, which is the sale price of the product less variable costs. The total fixed costs are $50k, and the contribution margin ($) is the difference between the selling price per unit and the variable cost per unit.

If you sell more than your break-even point, you’re making a profit. But if you sell less, your sales revenue won’t cover your expenses and you’ll operate at a loss. However, it’s not just a static number to aim for—it’s something you can influence by pulling other levers. For example, you could decrease the required number of subscriptions to break even by reducing the variable costs (like using AI customer service). Next, Barbara can translate the number of units into total sales dollars by multiplying the 2,500 units by the total sales price for each unit of $500.

1. It is also possible to calculate how many units need to be sold to cover the fixed costs, which will result in the company breaking even.
2. You need to know your break-even point to make important business decisions.
3. In the example of XYZ Corporation, you might not sell the 50,000 units necessary to break even.
4. For instance, if management decided to increase the sales price of the couches in our example by $50, it would have a drastic impact on the number of units required to sell before profitability.
5. Adam received his master’s in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology.

There is no net loss or gain at the break-even point (BEP), but the company is now operating at a profit from that point onward. Upgrading to a paid membership gives you access to our extensive collection of plug-and-play Templates designed to power your performance—as well as CFI’s full course catalog and accredited Certification Programs. If you do your accounting own accounting, you need a trial balance. All of your raw financial information flows into it, and useful financial information flows out of it. For more cost cutting ideas, check out our guide of 25 ways to cut costs. If you’re a latecomer timmy o’neill to a market, there might be too much supply, and you might not be able to break even without economies of scale.

The break-even point (BEP) is the amount of product or service sales a business needs to make to begin earning more than you spend. You measure the break-even point in units of product or sales of services. You need to know your break-even point to make important business decisions. Plus, venture capital firms, angel investors and lenders will want to know it, too. It dictates everything from how to price your products to when it might be the right time to expand. The break-even point (BEP) helps businesses with pricing decisions, sales forecasting, cost management, and growth strategies.

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Break-even analysis looks at fixed costs relative to the profit earned by each additional unit produced and sold. If your sales price is too low, you might have to sell too many units to break even. And as much as we think a lower price means more buyers, studies actually show that consumers rely on price to determine the quality of a product or service. It’s also important to keep in mind that all of these models reflect non-cash expense like depreciation. A more advanced break-even analysis calculator would subtract out non-cash expenses from the fixed costs to compute the break-even point cash flow level. This will give us the total dollar amount in sales that will we need to achieve in order to have zero loss and zero profit.

Note that in the prior example, the fixed costs are “paid for” by the contribution margin. The more profit a company makes on its units, the fewer it needs to sell to break even. In terms of its cost structure, the company has fixed costs (i.e., constant regardless of production volume) that amounts to $50k per year. Recall, fixed costs are independent of the sales volume for the given period, and include costs such as the monthly rent, the base employee salaries, and insurance. The hard part of running a business is when customer sales or product demand remains the same while the price of variable costs increases, such as the price of raw materials.

How to Calculate the Breakeven Point

To find the total units required to break even, divide the total fixed costs by the unit contribution margin. The break-even point is the volume of activity at which a company’s total revenue equals the sum of all variable and fixed costs. While the breakeven point is a valuable tool for decision-making, it has several limitations. One major downside is its reliance on the assumption that costs can be neatly divided into fixed and variable categories. For example, semi-variable costs, which have both fixed and variable components, can complicate the accuracy of the breakeven calculation which then changes the breakeven point in units.