Break-Even Point
Understanding your break-even point helps you know the minimum sales you need to cover your costs. Once you pass this level, your business starts to make a profit. Break-even analysis is simple, but extremely useful for pricing, planning and decision-making.
How to Calculate Break-Even Point
The break-even point BEP is the number of sales units or revenue earned that is equal to the costs incurred to produce those units or generate that revenue. In other words, the breakeven point is when a company’s total revenue equals its total costs. This point is also sometimes referred to as the “no-profit, no-loss” point. Break-even analysis is a tool businesses use to calculate break-even points.
The break-even analysis can help a business determine how many products it needs to sell to cover its costs. The break-even point analysis can also be used to assess different pricing strategies. For example, if a company knows it needs to sell 100 units to break even, it can determine how different price points will affect its profits.
If the business is not at a breakeven point or losing money, you will need to look at the reasons why and see if you can make changes, including:
- Can I reduce the fixed costs and variable costs of the business?
- Are sales prices too low?
- Is the business viable?
- Can I increase the production level?
In the article, we have included charts and examples to help make it simple to understand. There is also a free Excel template for entering your figures, which includes a chart.
Below is a break-even chart; this will help you to understand it better.
As you can see from the chart above, there is a crossover point for the sales and costs; this is the break-even point.
To understand it further, we need to look at the sales, variable and fixed costs.
Sales Revenue
Sales revenue is the income a company receives from the sale of goods or services. It is also referred to as sales turnover or simply sales.
A company’s sales revenue can be divided into two categories: gross sales and net sales. Gross sales are the total revenue generated from all sales, while net sales are the revenue generated after deducting the costs of goods sold. For this article, we are looking at gross sales.
Sales revenue is a key metric for businesses, as it indicates how well the company is performing. Businesses typically aim to increase year-over-year sales revenue to grow and become more profitable.
Difference Between Fixed and Variable Costs
Total Fixed Costs
Total Fixed costs are business costs that stay the same from week to week – they do not change. Examples of fixed costs are rent, rates, salaries, insurance and depreciation. If we look into rent in more detail, the rent agreement’s value will remain the same; it will not matter whether production is 1000 units or none at all.
Another fixed cost example is depreciation if a manufacturer purchases a machine to produce stock for resale. The cost of the machine is depreciated over a fixed time.
Fixed costs are part of an agreement over time and will not change during the period.
Total Variable Costs
Variable costs will increase or decrease in proportion to the number of unit produced. A good example of variable costs is materials. As the business increases production, more raw goods are needed. For a furniture manufacturer to make a table, it will need to double the wood to make two tables.
Other variable costs include labour in producing the product, sales commission and shipping charges.
Break-Even Point Formula
The image below shows the break-even point formula: fixed costs divided by the sales price minus variable costs. The sales price less the variable costs is also called the contribution margin.
The calculation will determine the point of sale at which the company breaks even.
Break-Even Point Example
ABC Computers has calculated its fixed costs to 21,000; they sell a computer for 700.00; the variable cost to produce each computer is 400.00 price per unit. The calculation is as follows:
21,000 fixed costs / (700 sales price – 400 variable cost per unit) =
21,000 / 300 = 70 units
70 units have a sales value of 700.00 each; therefore, the business’s break-even point is:
70 units * 700.00 = 49,000
The image below shows the figures and results.
ABC Computers struggles to reach its break-even point; they look at what will happen if they reduce their fixed costs or increase the selling price.
They have sourced new premises and reduced the fixed costs to 18,000 by lowering both the rent and rates.
18,000 / 300 = 60 units
The second option is to stay in their premises, but increase the sale price to 750.00
21,000 / (750-400) =
21,000 / 350 = 60 units
As you can see from the scenarios above, the breakeven point will be the same. There are advantages and disadvantages to both changes. If the business moves, there will be moving costs, and existing customers may not visit. If they raise the sales price, they may lose sales to competitors.
Advantages of Break-Even Analysis
Break-even analysis is a very important tool for any small business owner. This is because break-even analysis can help you understand your business’s financial situation and make informed decisions to improve it. Break-even analysis involves calculating your business’s break-even point, which is the point at which your business makes enough money to cover its costs.
This information can be very useful for setting prices, making investment decisions, and planning for the future. Break-even analysis can also help you to identify areas where your business is not performing as well as it could be, so that you can take steps to improve it.
Here is a quick list of advantages:
- Confirms financial situation
- Help make informed business decisions
- Useful for setting prices
- Can help identify areas of improvement
Break-Even in Revenue (£)
Some businesses find it more useful to calculate the break-even point in sales value rather than units. This is especially helpful for:
- Service-based businesses
- Businesses with variable pricing
- Retailers selling a mix of products
- Anyone who thinks in terms of turnover rather than units
Break-even in revenue tells you how much money you must bring in to cover all your costs.
How to Calculate Break-Even in Revenue
To work out break-even revenue, follow these two simple steps:
- Calculate break-even units = Fixed costs / (selling price – variable cost)
- Convert that into sales value = Break-even units x selling price
This turns your break-even point into a clear financial target.
Example
Using the product example:
- Break-even units = 1,000
- Selling price = £40
Break-even revenue = 1,000 × £40 = £40,000
This means the business needs £40,000 in sales to break even.
Example for a Service Business
If you normally quote in revenue rather than hours:
- Fixed costs: £18,000
- Hourly rate: £50
- Variable cost per hour: £8
- Contribution per hour = £42
- Break-even hours = £18,000 ÷ £42 ≈ 429 hours
- Revenue = 429 × £50 ≈ £21,450
Your break-even point is £21,450 of billable income.
Excel Break-Even Point Template
We have created a break-even point template for units in Excel, available for free download. The template includes a table to enter your figures, a results table, and a line chart, enabling you to see the results visually. It will save you from having to create your own spreadsheet.
Instructions for Break-Even Template
- Download the template available at the end of this page.
- The figures already entered are from the above example.
- Enter the units – this will depend on the quantities you sell. Some businesses may only sell a few products for which you will require 1 or 10. For a company selling larger quantities, 100 or even 1000 is more suitable.
- Enter the total fixed costs – Includes rent, salaries, insurance and depreciation
- Enter the total variable costs – including materials, direct labour, sales commission and delivery charges.
After posting the figures above, the following calculations take place.
- Contribution margin – the sales prices less variable costs
- Break-even points in units – how many production or sales volume units
- Break-even point in value (it can be any denomination)
The table will update, showing the profit or loss for each of the units. Below is the template using the figures from our example.
The break-even chart will also be updated to show the break-even point visually.
Break-Even Point Template Download
By downloading our free templates, you agree to our licence agreement, allowing you to use the templates for your own personal or business use only. You may not share, distribute, or resell the templates to anyone else in any way.
What is the break-even point (BEP)?
It is the level of sales (units or revenue) where the total income equals the total costs
Can I use BEP if I sell more than one product or service?
Yes — but you’ll need to calculate separate BEPs for each product/service
Why is the break-even point important?
The break-even point is crucial because it indicates the minimum level of sales required to avoid a loss. It helps you to set prices, spot risks early, and plan how many units or hours you need to work.
