If the analysis shows, for example, that a large number of products must be sold in order to reach the break-even point, a product idea can be eliminated in advance. In the context of the break-even point analysis, companies assess whether the costs of a product justify the benefits (profit). Using the formulas and example above, we have seen how the break-even point can be used for corporate strategy purposes. With such an analysis, companies estimate how many products or services they need to sell until they can fully cover the costs with the proceeds. It can be applied to a single product as well as to a complete product range. If we know the contribution margin (£2 - £0.5 = £1.5) we can also calculate the break even point using this:īreak Even Point (sales) = £1,000 / £1.5 = 666.67 Break Even Point Analysisīreak-even point analysis is used to evaluate the efficiency of a product or service. The company must therefore sell at least 667 units per month to cover the fixed costs. We now calculate the break-even point in units:īreak Even Point (unit) = £1,000 / (£2 - £0.5) = 666.67 units Let's look at the above formulas with an example: To manufacture a product, a company incurs the following costs: The contribution margin is the amount with which the fixed costs are covered. The contribution margin is obtained with the following formula:Ĭontribution margin = product price - variable costs The above formula can also be expressed using the contribution margin:īreak Even Point (sales) = Fixed costs / contribution margin The break-even point thus indicates how many units must be sold in order to cover the costs. The turnover per unit is the selling price of the product. The fixed costs are independent of the number of units sold, while the variable unit costs are dependent on this. Break Even Point in units: formulaīreak Even Point (unit) = Fixed costs / (Revenue per unit - variable costs per unit) There are two ways to calculate the break-even point. The break-even point is the point where the two curves intersect. The same diagram is then used to draw the revenues that are achieved through the sale of a certain sales volume. On the x-axis (horizontal axis) you plot the sales volume (how many products are sold) and on the y-axis (vertical axis) you plot the total cost of producing a given quantity of product. To determine the break-even point graphically, the total cost curve of a product over time is plotted in a diagram. The break-even point can be determined both graphically and mathematically. From the point at which the break-even point is exceeded, the company makes a profit through the sale. This means that the break even point is exactly £0 in total. for the production of a product) are equal to the revenue generated by the sale. The break-even point indicates the point at which the costs (e.g. We explain in this article with the help of formulas and an example how to calculate the break-even point and how the break-even point analysis helps companies. It provides information about the sales volume from which a company makes a profit with the sale of a product. To that end, your business should be taking advantage of Housecall Pro’s Invoicing software whenever possible.The break-even point is an important key figure in the cost-benefit calculation of a company. It’s near impossible to meet financial goals without detailed accounting practices, as any new business owner will soon discover. Your company would need 250 jobs per year or 21 jobs per month to break even at your current pricing structure.įiguring out the break even point for your business is a crucial step toward profitability. Now you’re ready to run your break even point calculations:įixed Costs / (Weighted Price – Weighted Variable Costs) Now let’s say your variable costs (materials, factory labor, etc.) break down to $200 per job. The average price of your services is $600 per job. Say your fixed costs (rent, salaries, insurance, etc.) are $100,000 per year. The second part of the equation is also called the contribution margin because it represents the dollar amount each unit contributes toward fixed costs. The basic formula is: Fixed Costs / (Price – Variable Costs). Now you have all of the necessary elements on hand to calculate a break even point. Step 4: Run the formula for your break even point
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