How to Calculate Break-Even Sales
The break-even point represents the level of sales at which a business neither makes a profit nor incurs a loss. It is a crucial concept in financial analysis, business planning, and decision making. To calculate the break-even sales, you need to know the fixed costs, variable costs, and selling price per unit of your product or service.
Here’s the formula to calculate the break-even point in units:
\(\text{Break-Even Point (Units)} = \frac{\text{Fixed Costs}}{\text{Selling price per Unit} – \text{Variable Cost per Unit}} \)
Then, to calculate the break-even sales in terms of dollars, multiply the break-even units by the selling price per unit:
\(\text{Break-Even Point (Units)} = \text{Break-even units} \times \text{Selling price per unit} \)
Where:
- Fixed costs are costs that do not change with the level of output like rent, salaries, and insurance.
- Variable costs are costs that vary directly with the level of output like direct materials and direct labor.
- Selling price per unit is how much you sell each unit of your product or service for.
It’s important to note that this simple model assumes all costs can be accurately classified into fixed and variable categories, and that these costs behave in a linear fashion, which may not be the case in reality.
Example of How to Calculate Break-Even Sales
let’s say you run a small business manufacturing and selling a type of gadget. Here’s the financial data:
- Fixed Costs (rent, salaries, utilities, etc.): $20,000 per month
- Variable Costs per unit (materials, labor, etc.): $15 per gadget
- Selling Price per unit: $50 per gadget
First, calculate the break-even point in units using the formula:
\(\text{Break-Even Point (Units)} = \frac{\text{Fixed Costs}}{\text{Selling price per Unit} – \text{Variable Cost per Unit}} \)
\(\text{Break-Even Point (Units)} = \frac{\$20,000}{\$50 – \$15} = \frac{\$20,000}{\$35} = 571.43 units \)
Since you can’t sell a fraction of a gadget, you’d need to sell 572 gadgets to cover your costs and break even.
To calculate the break-even sales in terms of dollars, multiply the break-even units by the selling price per unit:
\(\text{Break-Even Point (Units)} = \text{Break-even units} \times \text{Selling price per unit} \)
Break-even sales = 572 units * $50/unit = $28,600
So, you’d need to make $28,600 in sales revenue per month to cover your costs and break even. This gives you a clear target to aim for and helps you understand how changes in pricing or costs can affect your business.
