What is Break Even Point?
The Break Even Point is the necessary level of output for a company’s revenue to be equal to its total costs – or said differently, the inflection point at which a company begins to generate a profit.
How to Calculate Break Even Point (BEP)?
For all business owners, particularly during the earlier stages of a business, one of the most crucial questions to answer is: “When will my business break even?”
All businesses share the similar goal of eventually becoming profitable in order to continue operating.
An unprofitable business eventually runs out of cash on hand, and its operations can no longer be sustained (e.g., compensating employees, purchasing inventory, paying office rent on time).
By understanding the required output to break even, a company can set revenue targets accordingly, as well as adjust its business strategy such as the pricing of its products/services and how it chooses to allocate its capital.
If a company has reached its break-even point, this means the company is operating at neither a net loss nor a net gain (i.e. “broken even”).
All incremental revenue beyond this point contributes toward the accumulation of more profits for the company.
Conducting a break-even analysis is a prerequisite to setting prices appropriately, establishing clear and logical sales target goals, and identifying weaknesses in the current state of the business model that could benefit from improvements (e.g., sales tactics and marketing strategies).
Furthermore, established companies with a diverse portfolio of product/service offerings can estimate the break-even point on an individualized product-level basis to assess whether adding a certain product would be economically viable. In effect, the analysis enables setting more concrete sales goals as you have a specific number to target in mind.
Break Even Point Formula (BEP)
The formula for calculating the break-even point (BEP) involves taking the total fixed costs and dividing the amount by the contribution margin per unit.
To take a step back, the contribution margin is the selling price per unit minus the variable costs per unit, and this metric represents the amount of revenue remaining after meeting all the associated variable costs accumulated to generate that revenue.
That said, when a company’s contribution margin (in dollar terms) is equal to its fixed costs, the company is at its break-even point.
If its contribution margin exceeds its fixed costs, then the company actually starts profiting from the sale of its products/services.
what are the formulas for break-even variable cost and break-even fixed cost?
Hi, Hamish, Do you mean the $ value of breakeven, not the number of units? For breakeven variable costs, if fixed costs are truly fixed and the units are given, you would use: revenue per unit – fixed costs / units. Fixed cost breakeven if variable costs per unit and… Read more »
kindly would like to know how to calculate the break even points given the variable cost,fixed cost and the net profit only
You would not be able to calculate the break-even quantity of units unless you have revenue and variable cost per unit.
is it possible to use the “average” cost per unit in the BEP formula?
Yes, you would want to use the average cost per unit along with the average selling price to get the contribution margin per unit in the formula.
How to find higher or lower bep
Hi, Lozita, I am not sure what you mean asking how to find higher or lower BEP. The point of this is to find out how many units must be sold to breakeven, and that is based on the gross profit of each unit sold and the amount of fixed… Read more »
Profit when sale are 40000
Fixed exp 8000
What we mean here by BEP is the number of units that must be sold to just cover fixed costs so you would need to specify the revenue and variable costs per unit in order to know the BEP for fixed costs of 8000.
what are the formulas of BEP
Hi, Abraham, Do you mean the $ value of breakeven? For breakeven variable costs, if fixed costs are truly fixed and the units are given, you would use: revenue per unit – fixed costs / units. Fixed cost breakeven if variable costs per unit and units are given would be:… Read more »