How to Calculate a Breakeven Point
At that breakeven price, the homeowner would exactly break even, neither making nor losing any money. Therefore, PQR Ltd has to sell 1,000 pizzas in a month in order to break even. However, PQR is selling 1,500 pizzas monthly, which is higher than the break-even quantity, which indicates that the company is making a profit at the current level. From this analysis, you can see that if you can reduce the cost variables, you can lower your breakeven point without having to raise your price. If sales drop, then you may risk not selling enough to meet your breakeven point. In the example of XYZ Corporation, you might not sell the 50,000 units necessary to break even.
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Why Is the Contribution Margin Important in Break-Even Analysis?
The denominator of the equation, price minus variable costs, is called the contribution margin. After unit variable costs are deducted from the price, whatever is left—the fas in accounting contribution margin—is available to pay the company’s fixed costs. 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.
When companies calculate the BEP, they identify the amount of sales required to cover all fixed costs before profit generation can begin. The break-even point formula can determine the BEP in product units or sales dollars. In accounting terms, it refers to the production level at which total production revenue equals total production costs. In investing, the breakeven point is the point at which the original cost equals the market price. Meanwhile, the breakeven point in options trading occurs when the market price of an underlying asset reaches the level at which a buyer will not incur a loss. The breakeven formula for a business provides a dollar figure that is needed to break even.
- Upon selling 500 units, the payment of all fixed costs is complete, and the company will report a net profit or loss of $0.
- If you find yourself falling short of your break-even point month over month and feel like you can’t change your prices, lowering your fixed costs can be a solution.
- Or, if using Excel, the break-even point can be calculated using the “Goal Seek” function.
Methods to Calculate Break-Even Point
For instance, if the company sells 5.5k products, its net profit is $5k. After entering the end result being solved for (i.e., the net profit of zero), the tool determines the value of the variable (i.e., the number of units that must be sold) that makes the equation true. The break-even point (BEP) helps businesses with pricing decisions, sales forecasting, cost management, and growth strategies. A business would not use break-even analysis to measure its repayment of debt or how long that repayment will take. A breakeven point tells you what price level, yield, profit, or other metric must be achieved not to lose any money—or to make back an initial investment on a trade or project. Thus, if a project costs $1 million to undertake, it would need to generate $1 million in net profits before it breaks even.
To find the total units required to break even, divide the total fixed costs by the unit contribution margin. Note that in the prior example, the fixed costs are “paid for” by the contribution margin. The more profit a company makes on its taxpayer definition and meaning units, the fewer it needs to sell to break even.
Where Should We Send Your Answer?
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. To find your variable costs per unit, start by finding your total cost of goods sold in a month. If you have any other costs tied to the products you sell—like payments to a contractor to complete a job—add them to your cost of goods sold to find your total variable costs.
The selling price is $15 per pizza, and the monthly sales are 1,500 pizzas. If your price is too high, you might be falling short of your break-even point because customers won’t buy at that price. Lowering your selling price will increase the sales needed to break even.
