“When will my business start making a profit? That’s a big question for anyone starting a business. That’s why doing a breakeven analysis is so important. It helps you figure out the fixed costs, like rent, and variable costs, like materials, so you can set prices right and predict when your business will start making money. At the heart of this analysis is finding the breakeven point, the moment when your business covers all its costs and begins to make a profit.”
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What Is the BreakEven Point?
The breakeven point is the moment in business when total revenue equals total costs, resulting in neither profit nor loss. At this point, a business covers all its expenses, both fixed (like rent or salaries) and variable (like materials or production costs). Beyond the breakeven point, the business starts making a profit, while before it, there’s a net loss. Identifying the breakeven point is crucial for businesses as it helps set pricing strategies, make informed financial decisions, and determine when profitability begins.
BreakEven Point Formula
The breakeven point (BEP) can be calculated using the following formula:
\[ \text{BreakEven Point (in units)} = \frac{\text{Fixed Costs}}{\text{Selling Price per Unit} – \text{Variable Cost per Unit}} \]
This formula gives you the number of units you need to sell to cover all your costs and reach the breakeven point. Here’s a breakdown of the components:
 Fixed Costs: The total of all fixed costs incurred by the business, such as rent, salaries, utilities, etc.
 Selling Price per Unit: The price at which you sell each unit of your product or service.
 Variable Cost per Unit: The cost associated with producing each unit, including materials, labor, and other variable expenses.
How to Calculate Break Even Point in Units
Calculating the breakeven point in units involves a straightforward formula. Follow these steps:
1. Identify Fixed Costs:
Determine all fixed costs your business incurs, such as rent, salaries, utilities, etc. These are costs that do not change with the level of production.
2. Determine Selling Price per Unit:
Decide on the selling price for each unit of your product or service.
3. Find Variable Cost per Unit:
Identify the variable cost associated with producing each unit. This includes costs like materials, labor, and other variable expenses.
4. Apply the BreakEven Formula:

 Use the following formula to calculate the breakeven point in units:\[ \text{BreakEven Point (in units)} = \frac{\text{Fixed Costs}}{\text{Selling Price per Unit} – \text{Variable Cost per Unit}} \]
 This formula represents the number of units you need to sell to cover all your costs and reach the breakeven point.
5. Perform the Calculation:
Plug in the values from steps 1 to 3 into the formula and calculate the breakeven point in units.
BreakEven Point Examples
Example 1:
Let’s say the fixed costs are \($10,000\), the selling price per unit is \( $50\), and the variable cost per unit is \($30\). Calculatedthe breakeven point in units.
Using the following formula to calculate the breakeven point in units:\[ \text{BreakEven Point (in units)} = \frac{\text{Fixed Costs}}{\text{Selling Price per Unit} – \text{Variable Cost per Unit}} \]
\[ \text{BreakEven Point (in units)} = \frac{10,000}{50 – 30} = \frac{10,000}{20} = 500 \text{ units} \]
Example 2:
If the fixed costs are \($15,000\), the selling price per unit is \($80\), and the variable cost per unit is \($40\), the breakeven point in units is calculated as:
\[ \text{BreakEven Point (in units)} = \frac{15,000}{80 – 40} = \frac{15,000}{40} = 375 \text{ units} \]
Calculating the BreakEven Point in Sales Dollars
Calculating the breakeven point in sales dollars involves determining the level of sales revenue needed to cover both fixed and variable costs. The formula for calculating the breakeven point in sales dollars is:
\[
\text{BreakEven Point (in Sales Dollars)} = \frac{\text{Fixed Costs}}{\text{Contribution Margin Ratio}}
\]
The Contribution Margin Ratio is calculated using the formula:
\[
\text{Contribution Margin Ratio} = \frac{\text{Selling Price per Unit} – \text{Variable Cost per Unit}}{\text{Selling Price per Unit}}
\]
Example:
Suppose a business has fixed costs of $20,000, a selling price per unit of $100, and variable costs per unit amounting to $60. We can calculate the contribution margin ratio and then use it to find the breakeven point in sales dollars.
Calculating Contribution Margin Ratio:
\[
\text{Contribution Margin Ratio} = \frac{100 – 60}{100} = \frac{40}{100} = 0.4
\]
Now, we can use this ratio in the breakeven point formula:
Calculating BreakEven Point in Sales Dollars:
\[
\text{BreakEven Point (in Sales Dollars)} = \frac{20,000}{0.4} = 50,000
\]
In this example, the business needs to generate \($50,000\) in sales revenue to cover both fixed and variable costs and reach the breakeven point.