The break-even point is the level of sales at which total revenue equals total costs. In other words, it is the point at which a company neither earns a profit nor incurs a loss. The break-even point formula is as follows:
Break-Even Point = Fixed Costs / (Price per Unit – Variable Costs per Unit)
Fixed Costs: These are the costs that remain constant regardless of the level of sales. Examples include rent, salaries, insurance, and utilities.
Price per Unit: This is the amount charged per unit of product sold.
Variable Costs per Unit: These are the costs that vary depending on the level of sales. Examples include raw materials, direct labor, and sales commissions.
To use the break-even point formula, you need to know the fixed costs, price per unit, and variable costs per unit for your product. Once you have these figures, you can plug them into the formula to calculate the break-even point.
For example, if your fixed costs are $10,000 per month, your price per unit is $20, and your variable costs per unit are $10, the break-even point formula would look like this:
Break-Even Point = $10,000 / ($20 – $10) Break-Even Point = 1,000 units
This means that you need to sell 1,000 units of your product to break even. If you sell fewer than 1,000 units, you will incur a loss, and if you sell more than 1,000 units, you will earn a profit.