Calculating Break-Even Point – Analysis, Definition, and Formula with Examples

You can have a concept that inspires you to build a company or promote a product based on nothing more than a wish and a desire. Or maybe you're just looking to expand your product portfolio or recruit more people. It is, nevertheless, prudent to restrict your risk before diving in. Break-even analysis research will analyse the moment when your venture is successful, allowing you to know how you're going before investing your money and effort. A break-even analysis will give food for thought regarding pricing and cost modifications. It can inform you if you will have to take loan cash to maintain your firm running until you start making money or whether the venture is worth considering.

Did you know?

An increase in customer sales can lead to higher BEP for businesses. An increase in sales means higher demand to be met by the business resulting in higher production costs.  

What Is a Break-Even Point?

When your business achieves a break-even point, overall sales match entire costs. It implies you're earning a similar amount of money as you need to meet all of your expenditures and manage your business. Whenever you reach break-even, your company doesn't profit. However, it will not even have a deficit. Usually, the first time you hit a break-even threshold indicates that your organisation is on the right track. You've finally made enough income to support your operational costs when you reach break-even.

Identifying your break-even point can assist you in determining if you require undertaking either one or both of the following:

• Increase your costs.
• Reduce your spending.

If your company's revenue falls just under the break-even mark, it is making losses. However, if your income exceeds the threshold, you will gain profit. Establish your break-even point by calculating how much more you have to sell to pay your expenses or generate a profit. In addition, keep an eye on your break-even point to assist you in creating budgets, reducing expenditures, and agreeing on a pricing model.

Also Read: Accounting Cycle: Definition and Steps in the Accounting Cycle Process

Components of Break-Even Analysis

Usually, there are two kinds of break-even analysis.

• Fixed Cost: Fixed costs are expenses that the company defines when a thought enters the manufacturing stage and vary according to the amount of output. Rent, salary, taxation, interests, workforce, amortisation (spreading payments over multiple periods), and other operating expenditures are examples of fixed costs. These expenses do not fall on you due to manufacturing, and one has to expand it even if production does not occur.
• Variable Cost: Variable costs are costs that are directly relevant to output volume. Commodities, packaging, shipping, and other fees are variable costs.

Why Is Calculating the BEP Important?

If a company makes a lot of money, it may not always indicate that it is profitable. Understanding your company's break-even point can allow you to determine costs, allocate sales forecasts, and prepare business strategies. Measuring the break-even point is also important in determining significant sales factors, such as the number of sales, average manufacturing cost, or selling price.

You may determine the following by determining your break-even point:

• Profitability of currently available products/services
• The point at which a company's revenues begin to decline and lose money.
• Before the company analyse the profit, they should decide on the total number of selling units
• The effect of lowering the price/volume of selling
• Rises in pricing or sales volume to compensate for a rise in permanent expenses.

Break-Even Point Formula 

To understand the break-even point formula, you should first understand the break-even point equation. To figure out how to compute the break-even point, you'll have to have the following information:

• Fixed cost,
• Variable cost,
• Item's sale value.

There are several methods for calculating your break-even point. It usually depends on sales or unit count.

• Break-Even Point in (Units) Formula

Fixed Costs / (Income (Each Unit) – Variable Price (Each Unit) = BEP Units.

Fixed costs remain constant regardless of the number of total sales. Income is the value at which total sales minus variable expenses such as supplies, workforce, etc. To calculate the break-even point for each unit, split the fixed price by the income per unit and then deduct the variable costs per unit.

• Break-Even Point Sales Formula

Fixed Costs Contribution Margin = Break-Even Point

Divide fixed expenses by marginal costing to obtain break-even points depending on selling. One can calculate the contribution margin by deducting variable expenses from the cost of the item.

To explain both of the formulas mentioned above, one can summarise the components employed as follows:

• Fixed Costs: These include lease, property such as personal computers and software, and marketing and public relations expenditures, among other things.
• Contribution Margin: This is calculated by deducting the product's variable cost from the sales price.
• Contribution Margin Ratio: One can calculate the figure by deducting fixed expenses from the contribution margin. After determining the contribution margin ratio, you may continue to compute your break-even cost by reducing or rising income.
• Profit: When your company's sales match its fixed and variable costs, you've reached break-even. 

Applying the Break-Even Analysis 

Once you've determined your break-even point, you'll need to convert the assessment to concrete actions to reach it. At this point, if your existing strategy appears impracticable, you will need to take steps to correct it. For instance, you will have to sell many things to break even. It would also serve as a great opportunity to evaluate the issue holistically.

That is why corporations do a break-even study before beginning operations or marketing a new product. It assists them in determining if the new business or product will generate sufficient earnings to justify the costs of achieving that aim.

Break-even analysis is performed for various activities and processes, not simply start-ups and new item launches. Companies can employ a break-even process in their day-to-day management and forecasting, such as

• Price Adjustment: Businesses can change the pricing of their items if they believe the present cost is lower to accomplish the desired outcomes within the period they have set.
• Cost of Materials and Labour: Break-even analysis can also assist you in analysing labour and material expenses. If your company is overspending on labour and supplies, you might devise and implement strategies to reduce production costs without sacrificing quality.
• Launching New Products: Whenever releasing a new item, consider variable and fixed costs.
• Goals: With precisely linked aims at every top of the company, your organisation can gain short & long-term objectives in a far more viable manner.

Break-even analysis is an important part of vulnerability or scenario planning. The companies perform this for financial modelling reasons. Revenue for your company is increasing.

Also Read: Definition of Liquidity Ratio and Formula With Examples

Excel Template Download

We have built an incredibly simple Break-Even Template with pre-programmed calculations. Simply enter your fixed and variable expenses, and it will compute how much you will have to sell in terms of parts to break even. This analytic format would benefit new companies, online shopping sales, and other small firms.

Note: To update and change the Google Spreadsheet, store it to your Google Drive by selecting "Make a Copy" which you can see under file.

Break-Even Point Example Calculation

Here is one example of calculating your break-even point in units.

The number of items required to achieve your break-even threshold is the total amount of sales. To get your break-even point in units, remember to apply the given equations:

(Sales Cost (Each Unit) – Variable Price (Each Unit) / FC.

Assume you run a bookstore and would like to calculate your break-even point in terms of units. Your fixed expenses are ₹8,000, your variable expenses are ₹50, and the unit sale value is ₹100

 8,000/(100 – 50) = 160.

To break even, you must sell 160 items.

Conclusion

Finally, every company owner demands to learn how much sales they would require to earn a profit. The break-even assessment assists them in making critical business resolutions that will result in the best revenue. Knowing the break-even point and the procedures necessary to handle it will help you get the most out of your investments.
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