Break-Even Calculator

1. Break-even formula
2. How to calculate the break-even point?
3. Break-even analysis example
4. Breaking even – practical examples

    Break-even formula

When operating a business, one of the most important analytical tools you will come to use is the break-even analysis. The B/E point is a metric that shows you how much sales you need to reach before you begin realizing profit. In other words, it is the moment when your total costs are finally covered by your total revenue. ^[1]

Our break-even calculator is a useful tool to refer to when determining prices for the goods and services you offer, deciding on budgets or simply working on a business plan.

The break-even analysis relies on three crucial aspects of a business operation – selling price of a unit, fixed costs and variable costs. Your fixed costs are not influenced by the amounts you sell. A fixed cost, for example, is your rent. On the other hand, variable costs are largely dependent on the volume of work at hand – if you have more clients, you will need more labor, which equals a rise in variable expenses.

Having information about all three of these aspects, you can calculate your break-even point using the formula:

Break-even point measured in units = Total fixed costs / (Selling price of a unit – Variable costs per unit).

In this case, you estimate how many units you need to sell, before you can start having actual profit. The fixed costs are a total of all FC, whereas the price and variable costs are measured per unit.

However, if you want to calculate your break-even point in a purely financial expression, you can go with this formula:

Break-even point measured in $ = Total fixed costs / Contribution margin ratio,

where the contribution margin ratio is equal to the contribution margin divided by the revenue.

Another way to estimate the break-even point in dollars is to refer to the one in units:

Break-even point measured in $ = Selling price of a unit x Break-even point measured in units.

Finally, we will look at the formula that helps you calculate how many units you have to sell in order to reach your desired profit:

Number of sold units that provide the desired profit = Desired profit / Contribution margin per unit + Break-even point measured in units.

This is a step further from the base calculations, but having done the math on BEP beforehand, you can easily move on to more complex estimates. We use the formulas for number of units, revenue, margin, and markup in our break-even calculator which conveniently computes them for you.

    How to calculate the break-even point?

The break-even point is an extremely important starting goal to work towards. No matter whether you are a business owner, accountant, entrepreneur or even a marketing specialist – you will often come across this metric, which is why our online calculator is so handy.

However, it might be too complicated to do the calculation, so you can spare yourself some time and efforts by using this Break-even Calculator. All you need to do is provide information about your fixed costs, and your cost and revenue per unit. To make the analysis even more precise, you can input how many units you expect to sell per month.

The algorithm does the rest for you – it automatically calculates your profit margin and markup, and your break-even point both in terms of units sold and cash revenue. If you have specified your sales expectations, you will even see how much time it will take to reach the BEP.

Calculating the break-even point helps you determine how much you will have to sell before you can make profit. Knowing this, you can then regulate your marketing activity if you decide your sales are lower than expected, or just wish to reach the target sooner. This analysis can also serve as a much needed advisor on cutting costs and fixing selling prices.

Having a successful business can be easier and more achievable when you have this information. It makes the difference from operating at a loss to achieving financial goals and expanding production.

    Break-even analysis example

A break-even analysis is most easily done using a graphical representation of the quantities involved, which is why our calculator also produces a chart with all of them plotted. Here is how to analyze one such chart for an imaginary business entity producing goods at a cost of $10 per unit, selling them for $14 per unit and havign fixed operational expenses of $100,000 per year (load example):

In the graph above:

• We can see the total sales revenue, the total costs, the fixed costs and the variable costs.
• The green area corresponds to unit sales which result in net profit
• The red area corresponds to unit sales which result in net loss
• The net profit or loss is the dollar difference between the green line and the red line.
• The break-even point is where the red line (costs) crosses the green line (revenue)

Selling more units than the break-even point provides a margin of safety which can be expressed in terms of unit sales or sales revenue and results. In the above example, if the company sold 40,000 units instead of 25,000 it would result in a revenue of 40,000 · $14 = $560,000 at a cost of 40,000 · $10 = $400,000 resulting in a net profit of $560,000 - $400,000 = $160,000. These 160 thousand dollars represent the safety margin as well as the net operating profit of the business.

    Breaking even – practical examples

Now, let’s go through the break-even analysis step by step to illustrate its usefulness with a real-life example.

Michael is the owner of a brand new pizza shop. He is uncertain whether his venture will be successful and wants to know how long until it is profitable. He has estimated his total fixed costs to amount to $10,000, while the variable cost per unit is $2.50. He sells a slice of pizza for $3.90. Let’s now calculate the break-even point:

Break-even point measured in pizza slices sold = 10,000 / (3.90 – 2.50) = 10,000 / 1.4 = 2,564.

It looks like Michael will have to sell 2,564 slices before he can start profiting from his business. In dollars that is:

Break-even point measured in $ = 3.90 x 2,564 = 9,999.6.

By doing the math manually or via using our calculator, Michael now knows that he needs to sell about $10,000 in pizza slices before he can realize a profit for himself.