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Formula – How to calculate break even
Break Even Units = Fixed Costs ÷ (Price per Unit – Variable Cost per Unit)
Where:
- “Fixed Costs” are the costs that exist no matter how many units are sold.
- “Variable Costs” are the costs to produce each unit.
- “Price per Unit” is the price that each unit sells for.
Definition – What is a “Break Even” or a “Break Even Point”?
A break even point is the number of units that a business needs to sell to cover costs.
If a business:
- Sells more units than the break even point, they will be profitable.
- Sells the same number of units as the break even point, they will break even (make no profit or loss).
- Sells fewer units than the break even point, they will lose money.
Break even is calculated by looking at fixed (also known as overhead or indirect costs) and variable costs (the costs associated with producing more units) as well as the sale price of each unit.
The break even point is important in planning for both profitability and avoidance of loss.
Example
A business has a new product line with:
- Fixed Costs of $20,000
- Variable Costs of $10 per unit
- Units sell for $20 per unit
Break Even Units = 20,000 ÷ (20 – 10) = 20,000 ÷ 10 = 2,000
In this scenario, the firm will need to sell 2,000 units to break even.
Sources and more resources
- Wikipedia – Break-even – Wikipedia entry on the break-even point.
- BBC Bitesize – Breaking Even – A summary of the concept of break-even and how it is calculated.
- Tim Berry – Right and Left Brain Solutions – Break-Even Analysis – A PDF outlining the method to conduct a break-even analysis.
- Investopedia – Break-Even Analysis – An overview of break-even analysis and how to calculate it.
- The Balance SMB – Use this formula to calculate a Breakeven point – An explanation of the break-even point and how it is calculated.
- Accounting Tools – Breakeven point – A description of the breakeven point.
- Entrepreneur – How to calculate ‘Breakeven’ – An overview and breakdown of the breakeven point.