How to Calculate Breakeven

This article explains how to use the breakeven formula in order to figure out when you will start making profit with your company or business.

Instructions

Difficulty: Moderate

Things You’ll Need:

• Calculator
• Pencil
• Paper
• Financial data

1. The break-even analysis calculates break even point based on fixed costs, variable costs per unit of sales, and revenue per unit of sales.
2. Variable costs are costs that can change at any given time. These include things like cost of goods sold, sales commission, shipping charges, delivery charges, costs of direct materials or supplies, wages for PT or Temp help, and sales or production bonuses.
3. Fixed costs are costs that continue and remain the same throughout. These things include rent, interest on debt, insurance, plant and equipment expenses, business licenses, and salary of permanent FT workers.
4. Now, to figure cost per unit or job. In order to do this you will have to get your calculator out unless your brain is mathematically oriented, of course. In order to calculate cost per unit, add up all variable costs for the accounting period and divide the number of units sold, you will arrive at the cost per unit. The same goes for jobs if you own a service business.
5. Time to get out your financial data for your business or company. Your break even point can be determined by using the following formulas:
   (1)Sales price per unit-Variable costs per unit=Contribution Margin per unit. (2)Contribution margin per unit / Sales price per unit=Contribution Margin Ratio. (3)Breakeven Sales Volume=Fixed costs / Contribution Margin Ratio.
6. Here is an example: Let's say the financial statements for a bakery reveal that the bakery's fixed costs are $49,000.00, and its variable costs per unit of production(raisin bread) are $.30 (thirty cents). Further assume that its sales revenue is $1.00 per loaf. From this information, it can be determined that, after the $.30 per loaf variable costs are covered, each loaf sold can contribute $.70 toward covering fixed costs.
7. Dividing fixed costs by the contribution to those costs per unit of sales tells the bakery at what level of sales it will break even. In this case: $49,000/$.70 = 70,000 loaves. As sales exceed 70,000 loaves, the bakery earns a profit. Sales of less than 70,000 loaves produce a loss.
8. If you happen to own a financial calculator all you have to do is enter this information into it and you have results. However, it is handy to have the formula there to double check and make sure it is right.

Tips & Warnings

• It never hurts to be cautious, even with a calculator.
• This formula is handy when you do not have a calculator.
• Always double check your work, no matter what!