Back To Course

Financial Accounting: Help and Review18 chapters | 235 lessons

Are you a student or a teacher?

Try Study.com, risk-free

As a member, you'll also get unlimited access to over 75,000 lessons in math, English, science, history, and more. Plus, get practice tests, quizzes, and personalized coaching to help you succeed.

Try it risk-freeWhat teachers are saying about Study.com

Already registered? Login here for access

Your next lesson will play in
10 seconds

Lesson Transcript

Instructor:
*Tara Schofield*

The break-even point is an important measurement in understanding the health of a company. This lesson explains what the break-even point is, how the break-even point is calculated and the formula for determining the break-even point.

The **break-even point** is a critical number that must be analyzed within a business. It's the point where sales and expenses are the same or when the sales of a company are enough to cover the expenses of the business. While being at the break-even point does not allow for an income for the business, it does mean the company is able to pay all of the expenses without going in debt or having to close its doors.

To calculate the break-even point, there are specific numbers that are needed: sales and costs. Costs include fixed costs and variable costs. **Fixed costs** are expenses that remain relatively the same and don't change based on production or sales volume. Examples of fixed costs include rent or mortgage expenses, equipment expenses and capital expenditures. **Variable costs** are not consistent and change based on production output or a change in sales volume. Examples of variable costs include wages, utilities, commissions and marketing. Variable costs are flexible and can go up and down every month based on business activities. Cost of Goods Sold (COGS) is considered a variable cost because the amount will vary based on the quantity of products produced and the cost of the materials used to manufacture products.

The break-even formula is very straight-forward and easy to calculate. It just depends on what you're trying to calculate: the break-even point in units or the break-even point in dollars. First, we need to look at the break-even point in units.

- Break-Even Point in Units = Fixed Costs / (Price of Product - Variable Costs)

Let's look at an example where we can figure out the break-even point in units. Jane has just opened her own gourmet soda shop and is looking at her projected costs for the end of the first fiscal quarter, trying to determine what her break-even point is. Let's say her fixed costs for this first quarter, which include kegs, vats, delivery trucks, ingredients and the rent for the storefront, total out to $20,000, and her variable costs have been calculated to be $1.50 per unit, or in her case, per bottle of soda. She plans on charging approximately $2.00 a bottle, which she'll sell in six-packs. How many units will she have to sell to break even?

Let's break this down with our equation:

- Break-Even Point in Units = Fixed Costs / (Price of Product - Variable Costs Per Unit)
- Break-Even Point in Units = $20,000 / ($2.00 - $1.50)
- Break-Even Point in Units = $20,000 / ($0.50)
- Break-Even Point in Units = 40,000 units

So, in other words, Jane needs to sell 40,000 bottles during that first fiscal quarter to break even.

Now let's try to figure out the break-even point in dollars. The formula for figuring that out is really easy once you have the break-even point in units.

- Break-Even Point in $ = Sales Price Per Unit x Break-Even Point in Units
- Break-Even Point in $ = $2.00 x 40,000
- Break-Even Point in $ = $80,000

So, there you have it! Good thing Jane's gourmet soda is truly excellent!

Let's look at another example. Your friend Ethan has just opened a bakery. He's calculated his fixed costs (the rent for the storefront, the ingredients, etc.) as being $16,000 for that first quarter. His variable costs end up being $8.88 per cake he makes. Because he wants to turn a tidy profit and because he makes excellent cakes, Ethan decides that his sales price per cake will be an even $20. How many cakes is Ethan going to have to sell to break even? And how much money is he going to have to make? Let's go through our formulas again and figure this out.

First, let's take a look at how many cakes Ethan has to sell:

- Break-Even Point in Units = Fixed Costs / (Sales Price Per Unit - Variable Costs Per Unit)
- Break-Even Point in Units = $16,000 / ($20 - $8.88)
- Break-Even Point in Units = $16,000 / $11.12
- Break-Even Point in Units = 1,439 (rounded up)

So in other words, Ethan needs to sell approximately 1,439 cakes to break even. All right, so how much money does that translate to? Let's dive into the next part of the formula:

- Break-Even Point in $ = Sales Price Per Unit x Break-Even Point in Units
- Break-Even Point in $ = $20 x 1,439
- Break-Even Point in $ = $28,780

Ethan's going to have to make a lot of cakes and money to break even, that's for sure! Good thing he's great at what he does!

The **break-even point** is a fundamental financial measurement that managers use to ensure the company has enough income to cover the expenses of the business. It's defined as the point where sales and expenses are the same or when the sales of a company are enough to cover the expenses of the business. While the goal of most companies is to produce a profit, the first concern is making sure the debt and expenses are covered. To calculate the break-even point, a business owner needs to know the break-even formula, but first they need to know the variables: the **fixed costs**, which are expenses that remain relatively the same and don't change based on production or sales volume, and **variable costs**, which are not consistent and change based on production output or a change in sales volume. The break-even formula needs to be split into calculating the break-even point in units sold and break-even point in dollars. The formulas are as follows:

- Break-Even Point in Units = Fixed Costs / (Sales Price Per Unit - Variable Costs)
- Break-Even Point in $ = Sales Price Per Unit x Break-Even Point in Units

Using the break-even formula, managers can effectively evaluate the basic health of a company and make further decisions for profit growth and expense reduction.

**Break-even point**: the point at which sales and expenses are the same or the sales of a company are enough to cover the business expenses**Fixed costs**: expenses that remain relatively the same and don't change based on production or sales volume**Variable costs**: costs that are not consistent and change based on production output or a change in sales volume

Learn about calculating the break-even point in preparation to subsequently:

- Interpret the purpose of the break-even point
- Demonstrate the process of calculating the break-even point
- Note the importance of fixed costs and variable costs as you work through examples

To unlock this lesson you must be a Study.com Member.

Create your account

Are you a student or a teacher?

Already a member? Log In

BackWhat teachers are saying about Study.com

Already registered? Login here for access

Did you know… We have over 160 college courses that prepare you to earn credit by exam that is accepted by over 1,500 colleges and universities. You can test out of the first two years of college and save thousands off your degree. Anyone can earn credit-by-exam regardless of age or education level.

To learn more, visit our Earning Credit Page

Not sure what college you want to attend yet? Study.com has thousands of articles about every imaginable degree, area of study and career path that can help you find the school that's right for you.

You are viewing lesson
Lesson
28 in chapter 5 of the course:

Back To Course

Financial Accounting: Help and Review18 chapters | 235 lessons

- The Differences Between Accrual & Cash-Basis Accounting 6:20
- Using Accrual Accounting to Make Financial Statements More Useful 5:47
- Accrued Expenses & Revenues: Definition & Examples 4:30
- Preparing Financial Statements 7:35
- Temporary & Permanent Accounts: Definition & Differences 4:57
- Real Accounts vs. Nominal Accounts: Definition, Differences & Examples 4:55
- Debt Financing: Definition, Types, Advantages & Disadvantages
- Deficit Financing: Definition & Concept
- Differential Cost in Accounting: Definition, Analysis & Formula 5:21
- Direct Labor: Definition & Cost Formula
- Dividend Payout Ratio: Definition, Formula & Analysis
- How to Calculate Asset Turnover Ratio: Formula & Example 5:24
- How to Calculate Current Yield: Definition, Formula & Graph
- How to Calculate Depreciation Expense: Definition & Formula 8:08
- How to Calculate Free Cash Flow: Formula, Analysis & Example
- How to Calculate Future Value: Formula & Example 4:55
- How to Calculate Gross Profit Margin: Definition & Formula 3:24
- How to Calculate Interest Expense: Formula & Example 4:31
- How to Calculate Internal Rate of Return: Definition & Formula
- How to Calculate Net Present Value: Definition, Formula & Analysis 6:04
- How to Calculate Net Profit Margin: Definition & Formula 4:58
- How to Calculate Net Working Capital: Definition & Formula 5:06
- How to Calculate Owner's Equity: Definition, Formula & Examples 4:09
- How to Calculate Payback Period: Method & Formula 6:00
- How to Calculate Profit Margin: Definition & Formula
- How to Calculate Risk Premium: Definition & Formula 5:29
- How to Calculate Sales Revenue: Definition & Formula 3:37
- How to Calculate the Break-Even Point - Definition & Formula 6:12
- How to Calculate the Rate of Return: Definition, Formula & Example 5:04
- How to Calculate the Return on Equity: Definition, Formula & Example 3:31
- How to Calculate Yield to Maturity: Definition, Equation & Example 5:14
- Unearned Revenue in Accounting: Definition & Examples 4:46
- Go to Preparing Financial Statements: Help and Review

- Computer Science 109: Introduction to Programming
- Introduction to HTML & CSS
- Introduction to JavaScript
- Computer Science 332: Cybersecurity Policies and Management
- Introduction to SQL
- Progressive Politics & American Imperialism
- Reconstruction, Westward Expansion, Industrialization & Urbanization
- North America & the 13 Colonies
- The Renaissance & The Age of Exploration
- Algorithmic Analysis, Sorting & Searching
- CEOE Test Cost
- PHR Exam Registration Information
- Claiming a Tax Deduction for Your Study.com Teacher Edition
- What is the PHR Exam?
- Anti-Bullying Survey Finds Teachers Lack the Support They Need
- What is the ASCP Exam?
- ASCPI vs ASCP

- Convergent Sequence: Definition, Formula & Examples
- Mauryan Empire Art & Culture
- Multi-Dimensional Arrays in C Programming: Definition & Example
- Tests for Identifying Common Gases
- Singing Lesson Plan
- Arrays & Strings in JavaScript: Conversion & String Methods
- Heuristic Methods in AI: Definition, Uses & Examples
- Quiz & Worksheet - Average & Instantaneous Rates of Change
- Quiz & Worksheet - Speed, Velocity & Acceleration
- Quiz & Worksheet - Functions & Parameters Overview
- Quiz & Worksheet - Incremental & Radical Change
- Flashcards - Measurement & Experimental Design
- Flashcards - Stars & Celestial Bodies
- 11th Grade Math Worksheets & Printables
- Special Education in Schools | History & Law

- Thermodynamics Study Guide
- AP Biology Syllabus Resource & Lesson Plans
- HiSET Science: Prep and Practice
- Evolution Study Guide
- Physical Chemistry: Help & Review
- WEST Middle Grades Math: Triangle Theorems & Proofs
- NMTA Essential Academic Skills Reading: Classroom Management
- Quiz & Worksheet - Kinds of Informal Reports
- Quiz & Worksheet - Calculating Profit Function
- Quiz & Worksheet - Wind's Impact on Desert Landscapes
- Quiz & Worksheet - Group 1A Elements of Alkali Metals
- Quiz & Worksheet - Creating Multiple Columns within a Shape in PowerPoint

- Understanding Slide Orientation in PowerPoint
- Finding Effective Types of Sources
- HRCI Online Recertification & Continuing Education Credit
- Best MCAT Prep Books
- What is On the MCAT?
- Good Persuasive Writing Topics for Kids
- What is the ELM Test?
- How to Ace a Group Interview
- Independent Study Ideas
- Response to Intervention (RTI) in Illinois
- Life Cycle of a Frog Lesson Plan
- AP World History Exam Scores

- Tech and Engineering - Videos
- Tech and Engineering - Quizzes
- Tech and Engineering - Questions & Answers

Browse by subject