How to Calculate the Break-Even Point - Definition & Formula

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  • 0:00 Break-Even Point Definition
  • 0:29 Calculating the Break…
  • 1:22 Break Even Formula & Example 1
  • 3:19 Example 2
  • 4:53 Lesson Summary
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Lesson Transcript
Instructor: Tara Schofield

Tara has a PhD in Marketing & Management

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.

Break-Even Point Definition

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.

Calculating the Break-Even Point

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.

Break-Even Formula & Example 1

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!

Example 2

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:

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