The following equation is helpful when finding the break-even point using the algebraic method: This section provides an overview of the methods that can be applied to calculate the break-even point. Profit = (Unit sales price x Sales volume in units) - (Unit variable cost x Sales volume in units) - Fixed costs M ethods to Calculate Break-Even Point ![]() This equation can be restated as follows: Where the sales revenue at break-even point = Fixed cost + Variable cost Profit = Sales revenue - Variable costs - Fixed costs Formula For Break-Even PointĪs you will be aware, profit can be calculated as sales revenues minus costs, where costs are either variable or fixed. Sales below the break-even point mean a loss, while any sales made above the break-even point lead to profits. ![]() In other words, the no-profit-no-loss point is the break-even point. The basic objective of break-even point analysis is to ascertain the number of units of products that must be sold for the company to operate without loss. It is possible to calculate the break-even point for an entire organization or for the specific projects, initiatives, or activities that an organization undertakes. This point is also known as the minimum point of production when total costs are recovered. The income of the business exactly equals its expenditure. The break-even point is the point at which there is no profit or loss.Īt the break-even point, the total cost and selling price are equal, and the firm neither gains nor losses. The activity can be expressed in units or in dollar sales. Larger companies may look at the break-even point when investing in new machinery, plants, or equipment in order to predict how long it will take for their sales volume to cover new or additional fixed costs.The break-even point is the volume of activity at which a company's total revenue equals the sum of all variable and fixed costs. When a company first starts out, it is important for the owners to know when their sales will be sufficient to cover all of their fixed costs and begin to generate a profit for the business. Because of its universal applicability, it is a critical concept to managers, business owners, and accountants. While there are exceptions and complications that could be incorporated, these are the general guidelines for break-even analysis.Īs you can imagine, the concept of the break-even point applies to every business endeavor-manufacturing, retail, and service. After the next sale beyond the break-even point, the company will begin to make a profit, and the profit will continue to increase as more units are sold. At this stage, the company is theoretically realizing neither a profit nor a loss. Once we reach the break-even point for each unit sold the company will realize an increase in profits of \(\$150\).įor each additional unit sold, the loss typically is lessened until it reaches the break-even point. This relationship will be continued until we reach the break-even point, where total revenue equals total costs. ![]() If it subsequently sells units, the loss would be reduced by \(\$150\) (the contribution margin) for each unit sold. This loss explains why the company’s cost graph recognized costs (in this example, \(\$20,000\)) even though there were no sales. It would realize a loss of \(\$20,000\) (the fixed costs) since it recognized no revenue or variable costs. For example, assume that in an extreme case the company has fixed costs of \(\$20,000\), a sales price of \(\$400\) per unit and variable costs of \(\$250\) per unit, and it sells no units. \) is that, because of the existence of fixed costs in most production processes, in the first stages of production and subsequent sale of the products, the company will realize a loss.
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