Break-Even Analysis: Formula and Calculation

This difference is called your contribution margin, which is the amount each sale contributes toward covering fixed costs. This means you need to sell 667 units to cover all of your expenses. Companies typically do not want to simply break even, as they are in business to make a profit. Break-even analysis also can help companies determine the level of sales (in dollars or in units) that is needed to make a desired profit. The process for factoring a desired level of profit into a break-even analysis is to add the desired level of profit to the fixed costs and then calculate a new break-even point.

Fixed and variable costs

At this stage, the company is theoretically realizing neither a profit nor a loss. After the next sale beyond the break-even point, the company will begin to make a profit, and the profit will continue to increase as more units are sold. While there are exceptions and complications that could be incorporated, these are the general guidelines for break-even analysis.

Subscription-based business

Check out some examples of calculating your break-even point in units. Use a dollar break-even point to determine how much revenue you need to bring in to break even. To determine a break-even point, you can use two simple formulas. For the past 52 years, Harold Averkamp (CPA, MBA) hasworked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on AccountingCoach.com. For the past 52 years, Harold Averkamp (CPA, MBA) has worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online.

• Fixed costs are expenses that stay the same no matter how much you sell.
• This means you need to sell 667 units to cover all of your expenses.
• Existing businesses should conduct this analysis before launching a new product or service to determine whether or not the potential profit is worth the startup costs.
• This is the baseline amount your revenue needs to cover before you can earn a profit.
• Without knowing your break-even point, you could end up making financial choices blindly.

Knowing when and how your business will break even and become profitable will help you run a successful enterprise. No one likes to think about money flowing out of their business, but being honest and realistic about it is necessary. Use this online calculator from the US Small Business Administration for a quick calculation. In an economy buffeted by inflation, supply chain vulnerabilities, and a competitive talent market, grasping the break even point is not just an accounting exercise—it’s a survival strategy.

Step 1: Identify total fixed costs

A break-even point is only useful if it is up-to-date and accurate. Because metrics will change, you must consistently update your formula to keep a valid estimate of your expenses and profits. You need to sell at least 40 candles each month to cover your costs and start making a profit. You need to sell at least 50 subscription boxes each month to cover your costs and start making a profit. Fixed costs are consistent expenses that keep your business running. They are unlikely to change or may only change slightly and include rent, salaries, loan payments, subscription fees, marketing retainers, etc.

Identifying a break-even point helps provide a dynamic view of the relationships between sales, costs, and profits. Break-even analysis is typically handled by anyone who is responsible for setting budgets, pricing, or forecasting revenue. For smaller businesses, it’s often the founder or general manager. In larger companies, FP&A teams run break-even models to guide product launches, market expansion, or cost reviews. Variable costs are the direct expenses of producing a unit, such as raw materials and hourly labor costs. Total variable costs go up and down depending on how many units the business creates.

This $40 reflects the revenue collected to cover the remaining fixed costs, which are excluded when figuring the contribution margin. To confirm this figure, you can take the 1818 units from the first calculation, and multiply that by the $1.50 sales price, to get the $2727 amount. The break-even point allows a company to know when it, or one of its products, will start to be profitable. If a business’s revenue is below the break-even point, then the company is operating at a loss. As you can see, the $38,400 in revenue will not only cover the $14,000 in fixed costs, but will supply Marshall & Hirito with the $10,000 in profit (net income) they desire. Thus, to calculate break-even point at a particular after-tax income, the only additional step is to convert after-tax income to pre-tax income prior to utilizing the break-even formula.

He wants to know what kind of impact this new drink will have on the company’s finances. So, he decides to calculate the break-even point, so that he and his management team can determine whether this new product will be worth the investment. In a recent month, local flooding caused Hicks to close for several days, reducing the number of units they could ship and sell from 225 units to 175 units.

College Creations, Inc (CC), builds a loft that is easily adaptable to most dorm rooms or apartments and can be assembled into a variety of configurations. Each loft is sold for $500, and the cost to produce one loft is $300, including all parts and labor. The main purpose of break-even analysis is to determine the minimum output that what is the difference between a lease and a loan must be exceeded for a business to profit.

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. She holds a Bachelor of Science in Finance degree from Bridgewater State University and helps develop content strategies. This book may not be used in the training of large language models or otherwise be ingested into large language models or generative AI offerings without OpenStax’s permission. To illustrate the concept of break-even, we will return to Hicks Manufacturing and look at the Blue Jay birdbath they manufacture and sell.

How to use your break-even analysis

• Typically, the first time you reach a break-even point means a positive turn for your business.
• Instead of sorting through spreadsheets, you get the clarity you need to run smarter break-even models and act fast when costs or market conditions shift.
• To further understand the break-even point calculation, check out a few examples below.
• Carrying out an analysis can help you to find the best price for your products or services in terms of your profitability.
• For example, we know that Hicks had $18,000 in fixed costs and a contribution margin ratio of 80% for the Blue Jay model.
• In a recent month, local flooding caused Hicks to close for several days, reducing the number of units they could ship and sell from 225 units to 175 units.

When your company reaches a break-even point, your total sales equal your total expenses. This means that you’re bringing in the same amount of money you need to cover all of your expenses and run your business. To calculate a break-even point, you will need to understand the difference between fixed costs and variable costs at your business. Since we earlier determined \(\$24,000\) after-tax equals \(\$40,000\) before-tax if the tax rate is \(40\%\), we simply use the break-even at a desired profit formula to determine the target sales. It calculates the point at which your total revenue equals your total costs.

If you’re struggling with financial planning, this graph helps visualise where your business stands. If you don’t know when you’ll break even, you might be spending more than you’re earning without realising it. Understanding this point helps you stay in control of your finances and make informed decisions. It’s especially useful in the planning stage to assess financial viability. With the right tools and clean data, you can build a more resilient, cost-conscious business that’s set up to grow. An organization that doesn’t break even will result in losses, while a business that exceeds the break-even point will produce a profit.

The fixed costs are those that do not change, no matter how many units are sold. Revenue is the price for which you’re selling the product minus the variable costs, like labor and materials. The BEP in dollars is $30,000 as shown in the computation at 2,000 units. Alternatively, it can be computed as total fixed costs divided by contribution margin ratio.

Should I include taxes in my break-even calculation?

Anything above this represents your profits and means your business is profitable. Once you sell beyond this point, your business starts to make a profit. Our easy-to-use template will help you understand the cash coming in and going out of your business so you can make smarter decisions.