How to Calculate Break-Even Point
A business needs to know its break-even point (BEP). It is the point where sales equal the fixed and variable costs in producing an item over a period of time. It is the point where the company is not making a profit or a loss.
Knowing this figure will give a business the level it needs to sell to cover all the costs. Anything sold over the break-even point is in profit.
If the business is not at a break even point or making a profit, you will need to look at the reasons why and see if you can make changes, including:
- Can I reduce the costs of the business?
- Are sales prices too low?
- Is the business viable?
In the article, we have included charts and examples to help make it simple to understand. There is also a free excel template download to input your figures which includes a chart.
Below is a break even cart; this will help you to understand it better.
As you can see from the chart above, there is a cross over 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.
It is the net sales of the business.
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 stay the same; it will not matter if there is a production of 1000 units or no units 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.
Variable costs will increase or decrease in proportion to the production of a unit. A good example of variable costs is materials. As the business increases production, more raw goods are needed. For a furniture manufacturer making a table, it will need 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 is fixed costs divided by sales price less the variable costs. The sales price less the variable costs is also called the contribution margin.
The calculation will give the point of sales where the company breaks even.
Break-Even Point Example
ABC Computers has calculated its fixed costs to 21,000 it sells and computer for 700.00, the variable costs to produce each computer is 400.00. The calculation is as follows:
21,000 / (700-400) =
21,000 / 300 = 70 units
70 units have a sales value of 700.00 each; therefore, the 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 both the above scenarios, the break-even point will be the same. There are advantages and disadvantages to both changes. If the business moves, there will be costs in moving, and existing customers may not visit. If they increase the sales price, they may lose sales due to competition.
Excel Break-even Point Template
We have created a break-even point template in Excel available for free download. The template includes a table to enter your figures, a table with results and a line chart, enabling you to see the visual results. It will save you 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 are more suitable.
- Enter the fixed costs – Includes rent, salaries, insurance and depreciation
- Enter the variable costs – includes materials, direct labour, sales commission and delivery charges.
After posting the figures above, the following calculations take place.
- Contributions margin – the sales prices less variable costs
- Break-even points in units
- Break-even point in value (it can be any denomination)
The table will update showing the profit or loss on each of the units. Below is the template using the figures from our example.
The chart will also update, showing a visual of the break-even point.
Break-Even point Template Download
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