What Is A Break-Even Point? Examples And How To Calculate It

By Indeed Editorial Team

Updated 30 July 2022 | Published 28 April 2022

Updated 30 July 2022

Published 28 April 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

A break-even point or BEP is a financial calculation that determines which point in the production process the total revenue equals the total expenses. You can use this concept to identify the financial health of a company and determine variables that require adjustments. Whether you are starting a new business or planning to launch a new product, knowing everything about the break-even point can help you make better business decisions. In this article, we answer “What is a break-even point?”, explain its importance, understand how to calculate break-even point and provide some detailed examples.

What Is A Break-Even Point For A Business?

The answer to “What is a break-even point?” is that it is a point where the total revenue and total cost are equal, meaning that the business incurs no profit or loss. It is the point at which a business makes as much money as it spends. Understanding when a business reaches the BEP can help determine how many products the company sells to be profitable. This can also decide whether a new business idea is viable.

What Is A Break-Even Point For Trade Or Investment?

The break-even point for trade or investment is when the market price of an asset equals the asset's cost. You can apply the concept to a variety of contexts. For example, the BEP in a property is the money a homeowner requires to generate sales to offset the net purchase price of the property. This includes taxes, fees, interest paid, insurance and maintenance of the house.

Stock Market Break-Even Point

If an investor buys a company's stock at ₹900 and it is the BEP on the trade, then an investor makes money when the stock prices move above ₹900. The investor makes a loss when the stock price goes below ₹900. When the price remains unchanged at ₹900, the investor neither earns a profit nor makes a loss.

Why Is A Break-Even Point Beneficial?

A break-even analysis can help a business in the following ways:

  • Develops a pricing strategy: A break-even point is helpful for product pricing and controlling the cost of production. Using this technique, a business can price products and services to maximise profits.

  • Identifies missing expenses: As the break-even accounts for all variable and fixed costs, it helps a business identify missing production costs.

  • Sets realistic growth targets: Businesses can create realistic and achievable sales goals and growth targets using BEP.

  • Limits financial strain: Mitigates business risks by showing owners and stakeholders the right time to avoid a business idea. It can also help limit the financial strain of a bad business idea.

  • Makes intelligent business decisions: It helps a business limit decisions made on emotions. BEP enables a company to start a business based on facts.

  • Motivates employees: You can use the BEP to motivate and encourage your sales team. You can encourage the team to meet their goals and provide achievable sales targets by providing clear sales goals.

  • Launch new products and services: When a company knows their break-even point, it can decide the budget for promotional spending. Knowing the break-even can provide a realistic idea of the sales required to generate profits.

  • Track costs: Knowing the BEP can track business expenses. Tracking the cost can help you decrease the cost of goods sold by reducing overheads.

What Is The Break-Even Formula?

The break-even formula calculates the number of units a company sells or the sales required to reach the BEP. It determines how much a company sells to equal the total cost of production. This formula helps a business understand when it can become profitable. Here are two formulas for calculating the BEP:

Break-even point in units = Fixed cost / (Sales or selling price per unit – Variable cost per unit)

Break-even point in sales = Fixed cost / Contribution margin

Contribution margin = (Sales or selling price per unit – Variable cost per unit) / Sales or selling price per unit

How To Calculate The Break-Even Point

To compute the BEP of a company, follow these steps:

1. Calculate the fixed cost

A fixed cost is an expense that a company pays, regardless of the number of units a company sells. The fixed cost includes utilities, insurance, property tax and loan payments. These are indirect costs and do not impact the company's production. The cost does not change with an increase or decrease in the number of goods or services produced or sold.

Related: What Is Fixed Cost Formula? (Definition And Examples)

2. Calculate the variable cost

Next, you identify the variable cost of a company. A variable cost is an expense that changes with the sales of products and services. Variable cost includes shipping, raw material and commission paid to sales. For a textile manufacturing company, the variable cost might be a thread, raw cloth material, labour and freight. The more textile the company manufactures, the more the company's variable cost increases.

Related: How To Calculate Variable Cost In 3 Steps (With Examples)

3. Determine the selling price

The selling price is the price at which a company sells its products and services in the market. Focus on keeping the selling price at least as high as the cost of providing the service or manufacturing the product. Usually, when a company launches a new product, they offer the product or services at a low cost to capture the market.

4. Calculate the break-even point

Refer above to the formula for calculating the BEP. If you want to calculate the BEP in units, use:

Break-even point in units = Fixed cost / (Sales or selling price per unit – Variable cost per unit)

For calculating BEP in sales, use:

Break-even point in sales = Fixed cost / Contribution margin

Contribution margin = (Sales or selling price per unit – Variable cost per unit) / Sales or selling price per unit

You can use the result to make projections about units sold and revenue based on sales beyond the BEP.

Related: What Is Cost Unit? (Definition, Calculation And Examples)

Examples Of Calculating A Break-Even Point

Here are some examples of calculating the BEP:

Break-even point for units sold

Here are two examples to understand how many units a company sells to reach a BEP:

Example 1

Monitor Enterprise is launching a women's sneaker brand and wants to determine how many units the company might sell to become profitable. The company's fixed cost includes lease, property taxes, employee salaries and depreciation of assets is ₹6,00,000 per month. The variable cost associated with the production of sneakers includes raw material, factory labour and sales commission are ₹100 per unit. Monitor Enterprise sells the sneaker at ₹900 per unit. Here are the steps to calculate the BEP to understand when the company makes a profit:

BEP in units = Fixed cost / (Sales or selling price in units – Variable cost in units)

BEP in units = 600000 / (900 – 100) = 750

This means that the company has to sell 750 units per month to cover the fixed and variable expenses of the business and reach a BEP.

Example 2

Shaheer runs her boutique store called Shaheer Clothing, allowing him to sell the men's shirt designs. Shaheer Clothing decides the price of every shirt as ₹1600 per unit. As the head of finance, you calculate that his fixed cost includes salaries and assets and amount to ₹3,00,000. The variable cost of creating a single cloth includes raw material and labour charges amounting to ₹800 per unit. Here is how you can find the break-even point:

Breakeven point in sales = 3,00,000 / (1600 – 800) = 375.

Using this figure, Shaheer has to sell 375 shirts to break even.

BEP in sales revenue

Here is an example of understanding the sales revenue required by a company to reach a break-even point:

Monitor Enterprise is launching a women's sneaker brand and wants to determine how many units the company might sell to become profitable. The company's fixed cost includes lease, property taxes, employee salaries and depreciation of assets is ₹6,00,000 per month. The variable cost associated with the production of sneakers includes raw material, factory labour and sales commission are ₹100 per unit. Monitor Enterprise sells the sneaker at ₹900 per unit. Here are the steps to calculate the sales required to break even:

BEP in sales = Fixed cost / Contribution margin

Contribution margin = (Sales price per unit – Variable cost per unit) / Sales or selling price per unit

Contribution margin = (900 – 100) / 900 = 0.889

BEP in sales = 600000 / 0.889= ₹6,74,915.63

This means that the company has to make sales of ₹6,74,915.63 per month to cover the fixed and variable expenses and reach the BEP.

Related:
  • What Is Cost Unit? (Definition, Calculation and Examples)

  • Understanding Cost Of Goods Sold (With Formula And Methods)

  • What Is Cost Of Production? (With Factors That Affect It)

  • What Is Opportunity Cost? (Plus How To Calculate It)

  • What Is Standard Costing? (With Formula And Example)


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