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What Is the Break-even Point?

You want to make a profit when you own a small business. When you’re starting out, you might face losses for the first few years. Reaching the break-even point is a reason to celebrate. What is the break-even point?

What is the break-even point?

When a business reaches the break-even point, the total sales equal the total expenses. That means you bring in the same amount of money that you need to run your business.

At the break-even point, your business does not profit or generate a loss. The first time you reach the break-even point after operating at a net loss can indicate a positive turn for your business. By analyzing your break-even point numbers, you can figure out whether you need to increase your sales prices, cut expenses, or both to surpass the break-even point and turn a profit.

Knowing the break-even point is essential for making a profit. If you’re selling goods at the wrong price, you’re not going to make any money at your business. You have to know how to price a product and be able to work with numbers. That all comes from knowing the break-even point.

To find the break-even point, take a look at the break-even point formula.

Break-even point formula

You need to know your business’s fixed and variable costs if you want to use the break-even point formula.

Fixed costs do not change based on how many items you sell. These are the expenses you must pay to run your business, such as rent, insurance, and property taxes. You can count on fixed costs to remain the same when you create your business budget.

Variable costs, on the other hand, change when sales change. When you sell more items, your variable costs increase. Examples of variable costs include direct materials, direct labor, and credit card fees.

Break-even point examples

There are a couple of different ways to calculate and represent the break-even point in accounting.

Break-even point in units

Break-even point in units is the number of goods you need to sell to reach your break-even point. For example, you need to sell 50 coffees to reach your break-even point.

Break-even Point Unit

Take a look at this break-even point formula to determine the break-even point in units.

Contribution Margin = Sales Price Per Unit – Variable Costs Per Unit

The contribution margin shows you how much take-home profit you make from a sale.

Break-even Point in Units = Fixed Costs / Contribution Margin

Let’s say you own a toy shop and want to figure out your break-even point in units. You know your fixed costs per month, variable costs, and sales per toy.

To figure out how many toys you need to sell to break even, take a look at this break-even point in units example.

Fixed Costs = $4,500

Variable Costs = $10

Sales Per Toy = $20

Break-even Point in Units = Fixed Costs / (Sales Price Per Unit – Variable Costs Per Unit)

Break-even Point in Units = $4,500 / ($20 – $10)
Break-even Point in Units = $4,500 / $10
Break-even Point in Units = 450

Question: What is the break-even point in units?
Answer: You need to sell 450 toys each month to break even.

Break-even point in sales dollars

Break-even point in dollars is the amount of revenue you need to bring in to reach your break-even point. For example, you need $5,000 to cover your fixed and variable costs and reach your break-even point in sales.

You determine the break-even point in sales by finding the contribution margin ratio. The contribution margin ratio shows you the percentage of the sales amount you have left after you cover your variable costs.

Break-even Point sales

Here is the formula to find the break-even point in sales.

Contribution Margin Ratio = (Sales – Variable Costs) / Sales

Break-even Point in Sales = Fixed Costs / Contribution Margin Ratio

We will continue with the same variables from the break-even point in units example.

Fixed Costs = $4,500

Variable Costs = $10

Sales per toy = $20

Take a look at this break-even point in sales example to find out the amount of money you need to make.

Contribution Margin = Sales Price Per Unit – Variable Costs Per Unit

Contribution Margin = $20 – $10
Contribution Margin = $10

Contribution Margin Ratio = (Contribution Margin) / Sales

Contribution Margin Ratio = $10 / $20
Contribution Margin Ratio = $10 / $20
Contribution Margin Ratio = 0.5 (50%)

Break-even Point in Sales = Fixed Costs / Contribution Margin Ratio

Break-even Point in Sales = $4,500 / 0.5
Break-even Point in Sales = $9,000

Question: What is the break-even point in sales?
Answer: You need to make $9,000 to hit the break-even point.

Want to make finding the break-even point easier? With Patriot’s online accounting software for small business, you can track your income and expenses so you know how much money you’re bringing in as well as your fixed and variable expenses. Try it for free today!

This is not intended as legal advice; for more information, please click here.

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