During the current economic climate, it is more important than ever that a business understands their break-even position to make informed decisions and plan for the future.

Break-even point

A business’s break-even point is the stage at which total revenue equals total costs. Once a business has determined their break-even point, they may begin to assess pricing structure, costs and whether the business is sustainable at this break-even point.

How to calculate break-even point?

There are numerous ways for determining a break-even point.

1. Calculating break-even point based on sales when selling a product
• Break-Even Point = Fixed Costs / Gross Profit Margin

Example 1

If fixed costs = \$100,000 per month and Gross Profit Margin = 70% then your Break-even point = \$142,857. That is, you must sell at a minimum of \$142,857 per month to ensure that you don’t lose any money.

1. Calculating break-even point based on units
• Break-Even Point = Fixed Costs / (Revenue Per Unit – Variable Cost Per Unit)

Example 2

If variable cost per unit = \$20 and sales price per unit = \$25 then your contribution margin = \$5 per unit. So, if your overall fixed cost for the business is \$50,000 per month, then you must sell a minimum of 10,000 units per month to ensure that you don’t lose any money.

1. Calculating break-even point based on sales when selling a service
• Break-Even Point = Fixed Costs

Example 3

If fixed costs = \$100,000 per month then your Break-even point = \$100,000. That is, you must sell at a minimum of \$100,000 per month to ensure that you don’t lose any money.