Do you want to know the amount of goods your business needs to sell to cover all your business costs and make a profit? Doing some simple math, you can figure out how many items you need to sell to break even.
Break-Even Point Defined
Before you go into the process of calculating the number of units to sell to cover your costs, it’s important that you first understand the meaning of “break-even point” (BEP). The break-even point is the level at which the quantity of goods you produce or sell equals your total costs. Put simply, the profit you make when you break even is zero.
Purpose of Calculating Your Break-Even Point
Ultimately, the main reason for calculating break-even point in units is to figure out the number of units your company needs to produce to cover all expenses. Anything above the break-even point is profit, and knowing this production level may help you set your target income sales.
The number of break-even units may also help you identify the processes and costs you can restructure and reduce to obtain optimum results. If you’re a small business owner in search of funders, you may want to know to calculate BEP and prove to potential investors that your business covers all costs.
How to Calculate Break-Even Point
Let’s say you sell bouquets for $30. It costs you $5 in materials and labour — all variable costs — to put the bouquet together. Your total fixed costs are $50,000. There are two steps to calculate your break-even point. First, subtract your variable costs from your selling price to find the contribution margin per unit. In this example, your contribution margin per unit is $30 minus $5, or $25 per unit.
Second, divide your total fixed costs by your contribution margin per unit. By dividing $50,000 by $25 per unit, you arrive at your break-even point in units: 2,000. If you sell 2,000 bouquets, you break even. In essence, your break-even point indicates when you cover your business costs and start making profits. If you sell 2,001 bouquets, your business makes a profit of $25. This extra $25 represents your business’s margin of safety.
But what if you specialize in providing services? If you offer a service, the same math procedure applies. But you use hours in place of units. For example, if it costs you $10 to provide a particular service and you charge $20 per hour, you need to work at least 30 minutes to break even. If need be, add the materials you use to provide the services to the labour hours.
Units Break-Even Point at a Glance
The break-even level analysis helps you calculate your business’s margin of safety. Before starting a new company or introducing a new product, think about the costs that go into producing the goods. By calculating the contribution margin and units at break-even point, you figure out if your idea is good and if the business is viable.
Financial reports such as a profit and loss (income) statement may help you determine if your business covers its costs and makes profits. Using an accounting system, such as QuickBooks Online, you can generate a Profit and Loss statement automatically. Learn how today.