The break-even point can be determined through the following formula: FIXED COSTS ÷ (SALES PRICE PER UNIT – VARIABLE COSTS PER UNIT)įixed costs are the expenses that do not fluctuate (for example monthly rent). What is the Break Even Formula in Business? Everything below this point is produced at a loss and everything above this point is produced at a profit. This is the point where the costs and revenue are equal. You can interpret a break-even chart by locating the point where the total costs of the business meets the line for total revenue. The break-even point can be calculated by dividing the total costs affiliated with production, by the revenue per individual unit, minus the variable expenses per unit. Determining the break-even point informs a business whether they’re operating at a loss or a profit. The break-even point is the point at which a company’s income is equal to their costs. What if the break-even point is negative?.To ensure your business is on track with it’s finances, it’s imperative that the break-even point is calculated accurately and taken into account of the overall company finances. Contact us if you have questions or need help working through the calculations.For businesses, the break even point is a crucial element of any financial assessment. Alternatively, breakeven can help gauge the effects of cost reduction plans. In addition, breakeven analysis can tell you the amount of incremental sales you need to recoup an investment, such as buying a new machine or hiring a new salesperson. Many companies use breakeven point to set revenue goals and prepare budgets. If either of these variables changes, the breakeven point will change. In the example, variable expenses must remain at 90% of revenue and fixed expenses must stay at $1 million.

Monthly breakeven = $10 million / 12 = $833,333Īs long as expenses stay within budget, the breakeven point will be reliable. Here’s how those numbers fit into the breakeven formula:Īnnual breakeven = $1 million / 1 – ($10.8 million / $12 million) = $10 million For example, let’s suppose Division A generates $12 million in revenue, has fixed costs of $1 million and variable costs of $10.8 million. The basic formula for calculating the breakeven point is:īreakeven = fixed expenses / 1 – (variable expenses / sales).īreakeven can be computed on various levels: It can be estimated for the company overall or by product line or division, as long as you have requisite sales and cost data broken down. Examples: shipping costs, materials, supplies, advertising and training. If you had no sales revenue, you’d have no variable expenses and your semifixed expenses would be lower. Variable/semi-fixed expenses.Your sales volume determines the ebb and flow of these expenses. Examples: property taxes, salaries, insurance and depreciation. These are the expenses that remain relatively unchanged with changes in your business volume. To calculate your breakeven point, you need to understand a few terms:įixed expenses. More specifically, it’s where net income is equal to zero and sales are equal to variable costs plus fixed costs. It’s the point at which total sales are equal to total expenses. Here are the details.īreakeven can be explained in a few different ways. The breakeven point is fairly easy to calculate using information from your company’s income statement. Breakeven analysis can be useful when investing in new equipment, launching a new product or analyzing the effects of a cost reduction plan.

Revised break even point formula