Your business’s break-even point happens when revenues equal expenses exactly. You must keep the break-even point in mind because it shows how many sales you need to keep your business afloat and moving forward.
Break-Even Point Variables and Formula
Calculate the break-even point using three distinct variables to determine how many items you need to sell to make a profit.
- Fixed costs such as rent or labour costs.
- Variable costs, which are costs that fluctuate such as sales volume, such as raw materials for products.
- Sales price of the product.
The formula to calculate your break-even point is:
Break-even point in units = fixed costs / (price – variable cost)
For example, you have $15,000 of fixed costs for the month. You sell a widget for $25, and each widget costs $5 to manufacture in terms of variable costs.
The break-even point in units for the month for your widgets breaks down to:
$15,000 / ($25 – $5) = $15,000 / $20 = 750 units
You company becomes profitable for the month once you sell 751st widget.
Other Considerations for the Break-Even Point
If your company sells more than one product, you need to calculate the break-even point for each product you sell. That’s because the variable costs for each product are different. Your company may sell the same product but it has different sizes or varieties. You need to calculate the break-even point for those varying sizes, because the price changes and more raw materials go into them.
Tweaking the price in the formula for the break-even point can make the number of units go up or down. For example, if you change the price of the widgets in the above example to $30, your formula would become: $15,000 / ($30 – $5) = $15,000 / $25 = 600 units. This reduces the number of units you need to sell by 150. However, raising the price may make customers think twice about buying your widgets. You can lower the price of the widgets, but you must make up for the lower price by having a higher volume.
The break-even point comes in handy for figuring out whether you want to launch a new product. You can also gauge how much you may need to invest in a product before you see a return on your investment.
QuickBooks Online lets you track expenses and run custom reports so you can gauge how fast it takes to meet your break-even point during any given month. That’s why 4.3 million customers use QuickBooks. Join them today to help your business thrive for free.