What is Break-even Point?
Break-even point, also known as break-even analysis, is a financial metric used to determine the number of units or amount of money that must be reached for a business to cover its total costs. It is the point at which total revenue and total costs are equal, and there is no net loss or gain. By calculating the break-even point, businesses can determine how much they need to sell in order to be profitable.
How to Calculate Break-even Point?
The formula to calculate break-even point is: Break-even point = Fixed costs / (Unit price – Variable costs)
- Fixed costs: Fixed costs are costs that remain the same regardless of production or sale levels. Examples include rent, insurance, salaries, and loan payments.
- Unit price: This is the price of the product or service sold.
- Variable costs: Variable costs are costs that vary with production and sales levels. Examples include raw materials and packaging costs.
Examples of Break-even Point
Let’s look at an example. A business sells a product for $20. The cost of manufacturing each unit is $15 and the fixed costs are $500. Break-even point = $500 / ($20 – $15) = 33.33 units This means that the business must sell 33.33 units in order to cover the fixed costs and break-even. Let’s look at another example. A business sells a service for $50. The cost of providing the service is $30 and the fixed costs are $1,000. Break-even point = $1,000 / ($50 – $30) = 20 units This means that the business must sell 20 units in order to cover the fixed costs and break-even.
Conclusion
Break-even point is an important financial metric used to determine the number of units or amount of money that must be reached for a business to cover its total costs. By calculating the break-even point, businesses can determine how much they need to sell in order to be profitable. For more information on break-even point, please visit: