How to Calculate a Breakeven Point

Calculating your breakeven point allows you to discover the magic number where cost ends and profit begins. Calculating this crucial number is not difficult. The breakeven point can be expressed as a simple formula. After doing some initial information gathering you can calculate a breakeven point in a matter of seconds.

Things You'll Need

• Expense records
• Revenue records

Instructions

1. Identify variable expenses. Your variable expenses are the cost of producing your goods, or performing your services. The more product you sell, the higher your production costs. More clients visited means more money spent on gas and other travel expenses.

2. Identify fixed expenses. Some expenses are the same regardless of your sales. Your rent is a good example of a fixed expense. No matter how many or how few units you sell, you still have to pay the rent. Employee payroll and health insurance also represent fixed expenses.

3. Consider all other costs. Some costs have components that fall into both categories. The wages of hourly employees provide one example. While the cost of a 40 hour week for your employees is a fixed expense, high demand could create overtime. The overtime cost is a variable expense. In order to calculate your break even point, you will need to split these out into the proper category.

4. Calculate revenue. Once you have accounted for all expenses, you will need to determine your revenue. This is the total amount you accrue from products sold and services rendered. If you sell 500 units at $2.00 per unit your total revenue is $1000.

5. Calculate contribution margin. The contribution margin is the cost of producing a single unit. To calculate this, use the revenue from a single unit and subtract the variable expense cost for producing that unit. If for example, your variable expenses for producing a widget total $5.25 and you sell the widget for $10.00 your contribution margin is $4.75. This calculation is not directly used in the final steps, but it is an important check. The contribution margin represents the money you will have left for fixed expenses and profit. If your final breakeven point doesn't look right this calculation can give you some clues as to the cause of the problem.

6. Apply the formula. Now that you have your revenue and your expenses, the actual break even is easy to calculate by putting the values into a simple formula: FC/(1-VC/R). In the above formula, FC represents your fixed costs. The variable cost is VC and R is the total revenue from sales. If for example in a month where your revenue was $10,000 and, your total fixed expenses for the month added up to $1,000 with a variable expenses total $800 you would end up with:1,000/(1- 800/10,000). Doing the math, you will discover a break even point of $1,087.