Break-Even Calculator

The break-even point is the sales volume at which a company stops making losses but has not yet made any profit. It is only when all expenses have been covered and the next sale is made that an actual profit is generated.

This is a key figure that should be calculated before launching a product, signing a lease or putting together an offer. If the required sales volume exceeds what can actually be taken from the market, it will become apparent early on that costs are probably too high.

Formula for calculating break-even point:

Two numbers determine the result: The fixed costs that must be incurred regardless of sales volume and the contribution margin per item sold.

If you multiply this unit by the individual price, you get the same break-even point, but expressed as a turnover. This is the version that is often used in business plans.

An example of a calculation:

We buy a product for $30 and sell it for $45. Our monthly fixed costs (rent, insurance etc) total $2,700.

For every item sold there is a contribution of $15 that goes towards covering these fixed costs. If you divide 2700 by 15, it equals 180. Multiplying each unit by 45 gives us a sales figure of 8100.

At a sales volume of 181 units there is an excess of $15 and at a sales volume of 179 units there is a deficit of $15. That's all that really needs to be known about the profitability analysis.

How to use this calculator:

1. Enter the fixed costs for a given period, then enter the selling price and variable cost per unit. All three values must be for the same time period and in the same currency.

2. Check the break-even point, which is given both in units and sales dollars. The contribution margin per unit will be shown above so you can check your basis for the result.

3. Activate the sales planning function and test different sales figures to see what is realistically achievable. The tool will show you the profit or loss at that volume, how much above break-even it is and the price or unit cost required for that volume.

4. Activate the profit goal to ask a more complex question: instead of asking how to reach break-even point, you are wondering what sales numbers are required to earn a certain amount.

5. I'll check the graph. The point where the revenue line and total cost line intersect is the break-even point, and the gap that widens after that represents profit.

Fixed costs and variable costs.

The correct identification of these two categories is more important than the arithmetic itself. Fixed costs are those that occur regardless of whether a product is sold or not. Variable costs on the other hand only arise when a unit is produced or delivered.

There are also costs that can be difficult to classify. Hourly employees who work on demand, delivery trucks used only when there is a high volume of orders, and bonuses paid out only after a certain level of sales have been reached are all examples of partial costs. As a safety measure, it's always best to split the cost into both a fixed and variable component.

The marginal profit is a crucial figure.

The marginal revenue per unit is the selling price minus the variable costs. The degree of marginal revenue indicates the marginal revenue as a percentage of the selling price. This allows the calculation to be made not on the basis of units but rather sales.

The higher the marginal rate of return, the more cost can be covered per unit sold, which leads to a faster amortization of fixed costs and a lower break-even volume. The opposite is true for a low marginal rate of return: even a small price reduction can have significant effects.

If a product with a selling price of $45 is reduced by $5 the price falls by 11% while the marginal cost falls from $15 to $10, which is a reduction of one third. The break-even point rises from 180 units to 270 units. This asymmetry is exactly why this calculation should be done before setting a discount.

Factors that affect break-even point:

There are three levers that can be used to affect profitability. The following table shows the effect of each lever if fixed costs remain constant at $2,700, selling price is $45 and unit cost is $30.

Price is the lever that has the most effect but also carries the greatest risk. A 10% increase only makes sense if sales volume doesn't change. Before you commit, test realistic and slightly reduced volumes in your sales plan.

Margin of safety - how much margin is there actually?

The break-even point shows a lower limit. The safety margin indicates how far above that limit you are. This number determines whether a company can survive difficult quarters.

If 250 units are sold and the break-even point is calculated at 180 units, there will be a safety margin of 70 units, which represents sales of 28%. The company will only make losses if sales fall by more than a quarter.

Break-even point in profit target setting

No one runs a business with the sole aim of reaching break-even point. Adding an income target means that you are looking at your desired profit as another fixed cost item which must be covered.

If the fixed costs are $2,700, the contribution margin is $15 and the profit target is $1,500, then you would divide $4,200 by $15 to get a result of 280 units instead of 180.

Solving problems backwards

Often the sales volume is a fixed part of the problem. You have some idea of how many units the market can absorb and then the real issue becomes what price or unit cost is required to achieve that sales volume.

Reformulated this way, the same equation can answer both questions. The minimum price that can be charged is the sum of variable costs plus the share of fixed costs allocated to sales volume. The maximum cost per unit that can be absorbed is the price less the same share of allocated costs.

This calculator's sales planning displays these two results so that you can base negotiations with suppliers and review pricing on a single number rather than gut feeling.

When break-even analysis becomes useless:

• We are assuming a single product or average mix of products. For companies that offer multiple products, the weighted marginal utility must be calculated based on the sales mix and will change every time the sales mix changes.

• We are assuming that the fixed costs remain constant over the entire range. In reality, the fixed cost will increase in steps - for example by adding a second shift, a larger premises or more delivery vans. Each time they do so, the calculation has to be done again for all quantities above this point.

• We assume that prices do not change. Due to volume discounts, seasonal promotions and channel fees the revenue line is more curvy than straight.

• The timing of the money coming in is ignored. The break-even analysis does not show whether the money comes in on time to pay bills. This is usually a different more urgent problem.

• It is not the same as payback period. The break-even analysis asks how many units must be sold to cover operating costs. Payback period asks how long it will take to recover the initial investment.

Even with these limitations, this figure is not useless; it's just a starting point. It should be reviewed whenever there are changes in costs, prices or product mix.

This calculator is for planning and general information purposes only, based on the figures you enter, and does not replace advice from a qualified accountant.