A business’ break-even point is the point where revenues exactly equal expenses. It is critical to know this figure because it shows how much sales are needed to simply keep the business alive. The break-even point is calculated using three variables:
*Fixed costs – these are costs independent of sales volume, such as rent or salaries.*Variable costs – these costs fluctuate with sales volume, such as raw materials for products.*Sales price of the product
The formula is:
Break-even point in units = fixed costs / (price – variable cost)
For example, assume a company has $15,000 fixed costs for the month, sells a widget for $25, and each widget costs $5 to manufacture. The break-even point in units for the month is:
$15,000 / ($25 – $5) = $15,000 / $20 = 750 units
The company will be profitable for the month once the 751st unit is sold.