3 2 Calculate a Break-Even Point in Units and Dollars Principles of Accounting, Volume 2: Managerial Accounting

Since the price per unit minus the variable costs of product is the definition of the contribution margin per unit, you can simply rephrase the equation by dividing the fixed costs by the contribution margin. The Break-even point is calculated by dividing the fixed costs by the sales price per unit minus the variable cost per unit. Use this calculator to easily calculate the break even point for any product or service. Estimate how many units you need to sell before you break even, covering both your fixed and variable costs, and how long it would take you. Simply enter your fixed and variable costs, the selling price per unit and the number of units expected to be sold.

1. Fixed costs are costs that remain the same regardless of how many units are sold.
2. The study is for a company’s management use only, as the metrics and calculations are not used by external parties, such as investors, regulators, or financial institutions.
3. When a manufacturing business buys new production equipment, it replaces variable labor costs with a fixed cost.
4. This means that in each period before the company starts to generate a profit, it must cover all of its fixed costs.
5. Let’s assume that we want to calculate the target volume in units and revenue that Hicks must sell to generate an after-tax return of $24,000, assuming the same fixed costs of $18,000.

As you can see, the $38,400 in revenue will not only cover the $14,000 in fixed costs, but will supply Marshall & Hirito with the $10,000 in profit (net income) they desire. By knowing at what level sales are sufficient to cover fixed expenses is critical, but companies want to be able to make a profit and can use this break-even analysis to help them. Profitability may be increased when a business opts for outsourcing, which can help reduce manufacturing costs when production volume increases. By implementing business growth and cost reduction strategies, management can change the break even point for your business calculated by financial analysts.

Break-Even Point Formula (BEP)

An IT service contract is typically employee cost intensive and requires an estimate of at least \(120\) days of employee costs before a payment will be received for the costs incurred. As you can see, the Barbara’s factory will have to sell at least 2,500 units in order to cover it’s fixed and variable costs. Anything it sells after the 2,500 mark will go straight to the CM since the fixed costs are already covered. In stock and option trading, break-even analysis is important in determining the minimum price movements required to cover trading costs and make a profit. Traders can use break-even analysis to set realistic profit targets, manage risk, and make informed trading decisions.

Businesses can even develop cost management strategies to improve efficiencies. For options trading, the breakeven point is the market price that an underlying asset must reach for an option buyer to avoid a loss if they exercise the option. The breakeven point doesn’t typically factor in commission costs, although these fees could be included if desired. Using the BEP formula, two popular methods are often used to calculate the break-even point. However, both ways require businesses to know their fixed, variable, and selling costs.

Loan Calculators

The break-even point allows a company to know when it, or one of its products, will start to be profitable. If a business’s revenue is below the break-even point, then the company is operating at a loss. Thus, to calculate break-even point at a particular after-tax income, the only additional step is to convert after-tax income to pre-tax income prior to utilizing the break-even formula.

However, if the company falls below the break-even point, it incurs losses. Upon doing so, the number of units sold cell changes to 5,000, and our net profit is equal to zero, as shown below in the screenshot of the finished solution. Variable Costs per Unit- Variable costs are costs directly tied to the production of a product, like labor hired to make that product, or materials used.

We know that Hicks Manufacturing breaks even at \(225\) Blue Jay birdbaths, but what if they have a target profit for the month of July? By calculating a target profit, they will produce and (hopefully) sell enough bird baths to cover both fixed costs and the target profit. Revenue represents total income generated from the sale of goods or services by an individual or business. The contribution margin is the difference between revenue and variable costs. The final component of break-even analysis, the break-even point, is the level of sales where total revenue equals total costs.

Otherwise, the business will need to wind-down since the current business model is not sustainable. Let’s show a couple of examples of how to calculate the break-even point. Over 1.8 million professionals use CFI to learn accounting, financial analysis, modeling and more. Start with a free account to explore 20+ always-free courses and hundreds of finance templates and cheat sheets.

The break-even analysis makes it simple and easy to strategies and plan your next steps to make your business profitable. This is another free calculator for calculating the break-even point. This calculator provides a graphical representation of break-even point analysis and provides a report based on your input. Neil has a protein supplement company that wants to introduce a new flavour. Before launching this new flavour, he wants to determine how it will impact his company’s finances. That’s why he decided to calculate the break-even point to find out if it was worth the investment.

Factors that Increase a Company’s Break-Even Point

In contrast to fixed costs, variable costs increase (or decrease) based on the number of units sold. If customer demand and sales are higher for the company in a certain period, its variable costs will also move in the same direction and increase (and vice versa). The formula for calculating the break-even point (BEP) involves taking the total fixed costs and dividing the amount by the contribution margin per unit.

The break-even number of units is the point at which a company expects neither a profit nor a loss on the total number of products or services sold. The break-even number of teams allows a business to understand whether its effects will start to bring profit to the company. You would not be able to calculate the break-even quantity of units unless you have revenue and variable https://simple-accounting.org/ cost per unit. Since we earlier determined $24,000 after-tax equals $40,000 before-tax if the tax rate is 40%, we simply use the break-even at a desired profit formula to determine the target sales. As you can see, when Hicks sells 225 Blue Jay Model birdbaths, they will make no profit, but will not suffer a loss because all of their fixed expenses are covered.

For each additional unit sold, the loss typically is lessened until it reaches the break-even point. At this stage, the company is theoretically realizing neither a profit nor a loss. After the next sale beyond the break-even point, the company will begin
to make a profit, and the profit what goes in the post closing trial balance will continue to increase as more units are sold. While there are exceptions and complications that could be incorporated, these are the general guidelines for break-even analysis. Break-even analysis is the effort of comparing income from sales to the fixed costs of doing business.

Calculating The Break-Even Point in Sales Dollars

The break-even number of units can be understood by determining the break-even point. Get instant access to video lessons taught by experienced investment bankers. Learn financial statement modeling, DCF, M&A, LBO, Comps and Excel shortcuts. To illustrate the concept of break-even, we will return to Hicks Manufacturing and look at the Blue Jay birdbath they manufacture and sell.