The Break-Even Point – What is it, Why does it Matter, and how do you calculate it?

Knowing what your break-even point is, is critical in any business. Whether it’s understanding how many units you need to sell or how much revenue you need to generate, understanding break-even is the difference between success and failure.

What is “Break-even”?

Quite simply, the break-even point is where revenue equals cost. Some businesses measure their break-even point in terms of how many units of sales need to be made in order to equal their costs – others in terms of how much revenue must be generated. Either way, knowing when your products, services or your business as a whole becomes profitable is vital.

So, How do I Calculate my Break-even Point?

Whether you’re looking at a specific product or service, or your business as a whole, there are three key “ingredients” in calculating your break-even point.
FIXED COSTS
These are the underlying costs associated with running your business. Rent, rates, lights, wages and the like.
VARIABLE COSTS
These are the costs specifically associated with the product or service you are selling. Consider factors such as how much the product costs to manufacture, ship and store.
UNIT SALES PRICE
This, as you may have guessed, is the cost to the customer of one individual unit of product, or one instance of a service. Once you have these three figures, you can calculate your break-even point using this simple equation:   Let’s take a look at an example to put these numbers into context… Bob’s Hardware Store is considering adding a new line of ladders to their offering. Demand for ladders seems to be increasing in the area and Bob wonders if the new ladders he’s seen could help boost their profits.
Break-even in Units
Bob calculates his break-even point as follows: Fixed costs = \$2,500 per month Variable costs of the new line = \$20 per ladder Sales price per ladder = \$45 Bob divides his fixed costs (\$2,500) by the sales price minus the unit variable costs (\$45 – \$20 = \$25) and arrives at the figure 100. Bob now knows he must sell 100 ladders per month to “break even”.
Break-even in Dollars
To discover his break-even point in Dollars, Bob needs to think in terms of Contribution Margin. That’s  the difference between the sell price and the cost to make that product. It is calculated as follows: The Contribution Margin of Bob’s new ladders is (\$45 – \$20) / \$45 = \$0.56. The equation to calculate the break-even point in Dollars is:   So in Dollar terms, Bob’s break-even point is \$2,500 / \$0.56 = \$4,464. That’s the revenue Bob needs to generate to break even with the new ladders. Allowing for rounding up and down, we can see that this number compares directly to the 100 ladders @ \$45 Bob needs to sell.
Understanding break-even points allows you to determine whether products and services are contributing to your business’s profits. It helps you determine optimal selling prices and assess how many units of a product or service you need to sell to remain profitable.

Billwaze

Jeff Liebov is the CEO & Founder of BILLWAZE. Jeff envisioned a simpler way out of the complicated world of accounting apps and created BILLWAZE. As a tool, BILLWAZE makes things easy for those who want to get things done fast, without all the hassle. Jeff and the team are continuously improving the platform and are passionate about making the entire billing process simpler than ever.

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