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June 16, 2022  To calculate the break-even point in units use the formula: Break-Even point (units) = Fixed Costs ÷ (Sales price per unit – Variable costs per unit) or in sales dollars using the formula: Break-Even point (sales dollars) = Fixed Costs ÷ Contribution Margin. Here’s What We’ll Cover: What Is the Break-Even Point? What Is the Formula for the Break Even Point? Break-Even Point Examples NOTE: FreshBooks Support team members are not certified income tax or accounting professionals and cannot provide advice in these areas, outside of supporting questions about FreshBooks. If you need income tax advice please contact an accountant in your area. What Is the Break-Even Point?The break-even point is the point where a company’s revenues equals its costs. The calculation for the break-even point can be done one of two ways; one is to determine the amount of units that need to be sold, or the second is the amount of sales, in dollars, that need to happen. 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. If it’s above, then it’s operating at a profit. How to Calculate Break Even Point in UnitsFIXED COSTS ÷ (SALES PRICE PER UNIT – VARIABLE COSTS PER UNIT) Fixed Costs – Fixed costs are ones that typically do not change, or change only slightly. Examples of fixed costs for a business are monthly utility expenses and rent. Sales Price per Unit- This is how much a company is going to charge consumers for just one of the products that the calculation is being done for. Variable Costs per Unit- Variable costs are costs directly tied to the production of a product, like labor hired to make that product, or materials used. Variable costs often fluctuate, and are typically a company’s largest expense. The calculation is as follows: Total variable costs ÷ Total units produced Break-Even Point ExamplesLet’s show a couple of examples of how to calculate the break-even point. Sam’s Sodas is a soft drink manufacturer in the Seattle area. He is considering introducing a new soft drink, called Sam’s Silly Soda. 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. His accounting costs are as follows, for the first month the product will be in production: Fixed Costs = $2,000 (total, for the month) Variable Costs = .40 (per can produced) Sales Price = $1.50 (a can) Calculating the Break-Even Point in UnitsFixed Costs ÷ (Sales price per unit – Variable costs per unit) This means Sam needs to sell just over 1800 cans of the new soda in a month, to reach the break-even point. Calculating the Break-Even Point in Sales DollarsFixed Costs ÷ Contribution Margin Fixed Costs (See above) Contribution Margin Contribution Margin is the difference between the price of a product and what it costs to make that product. The calculation is as follows: (Sale price per unit – Variable costs per unit)/Sale price per unit Break-Even Point ExamplesLet’s show a couple of examples of how to calculate the break-even point. Sam’s Sodas is a soft drink manufacturer in the Seattle area. He is considering introducing a new soft drink, called Sam’s Silly Soda. 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. His accounting costs are as follows, for the first month the product will be in production: Fixed Costs = $2,000 (total, for the month) Variable Costs = .40 (per can produced) Sales Price = $1.50 (a can) Calculating The Break-Even Point in UnitsFixed Costs ÷ (Sales price per unit – Variable costs per unit) $2000/($1.50 – $.40) Or $2000/1.10 =1818 units This means Sam needs to sell just over 1800 cans of the new soda in a month, to reach the break-even point. Calculating The Break-Even Point in Sales DollarsFixed Costs ÷ Contribution Margin (Sales price per unit – Variable costs per unit, with resulting figure then divided by sales price per unit) $2000/.7333=$2727 This means Sam’s team needs to sell $2727 worth of Sam’s Silly Soda in that month, to break even. Anything after that amount, will be profit for the company. 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. More Resources on Small Business Accounting
RELATED ARTICLES When a company is operating at its breakeven point?The break-even point is the point where a company's revenues equals its costs. The calculation for the break-even point can be done one of two ways; one is to determine the amount of units that need to be sold, or the second is the amount of sales, in dollars, that need to happen.
What term describes the point at which the number of units sold generates enough revenue to equal total costs?The break-even point is reached when total costs and total revenues are equal, generating no gain or loss (Operating Income of $0). Business operators use the calculation to determine how many product units they need to sell at a given price point to break even or to produce the first dollar of profit.
Which of the following factors would cause the breakThe break-even point will increase by any of the following: An increase in the amount of the company's fixed costs/expenses. An increase in the per unit variable costs/expenses. A decrease in the company's selling prices.
What is meant by the term breakBreak-even Point. The point at which sales revenue equals the total cost of producing a good or service. Unit.
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