A break-even analysis is a financial tool that helps judge the economic feasibility of a business. Jargon aside, it is a tool that you can use to see if your company, product, or service will be profitable. The “break-even” point is the point where you’re not making or losing any money. It is that point where your gains are just enough to offset the fixed costs.
Finding out the break-even point is very crucial before you make business decisions. It will help you determine exactly how much sales/profit you must generate before you start making money. However, before you can begin using the calculator, it is essential to know the components that make up a break-even analysis.
Components Of Break-Even Analysis
Break-even analysis primarily consists of two cost components: fixed costs and variable costs.
It is essential to know the differences between the two, on a broad scale. The names pretty much speak for themselves. Fixed costs remain constant regardless of other factors (think, cost of machinery, rent, tax, etc.), while variable costs vary directly with the number of units produced.
As far as break-even analysis goes, the fixed cost is the figure of interest. Your aim should be to recoup your fixed cost as soon as possible. The variable costs will pay for themselves through
the profit margins.
Now that you know the components that make up a break-even analysis, it is time to see how to put them together. The next three sections talk about the three kinds of break-even analysis that you can do with our calculator.
If you are investing in machinery or other fixed assets to make this happen, check out our depreciation calculator to see how your asset will be accounted for over time.
How To Calculate Break-Even Point For Total Sales
The first step to calculate your break-even sales point is to know how much of your cost stays constant. Then, enter the total estimated variable cost, variable cost per unit, and an estimate of the number of units you plan to sell. You can enter the price at which you want to sell the product, or leave it blank. You will have to interpret your final result accordingly.
Calculate the contribution margin by subtracting the variable cost per unit from the selling price before dividing it by the selling price. Next, divide the total fixed cost by the contribution margin to arrive at the final sales amount required to break-even.
For example, if your fixed cost is $10000, the selling price is $100, and the variable cost/unit is $10, your contribution margin comes up to be 90%, or 0.9. Additionally, dividing $10000 by 0.9 yields a break-even sales point of $11,111.11.
How To Calculate Break-Even Point For Units Sold
After determining the total fixed cost of your venture, it is vital to fix a potential selling price for each unit. Subsequently, you will also need the estimated variable cost per unit. Enter these and all other relevant values into the calculator.
To calculate the break-even point for units, divide the total fixed cost by the difference between selling point and variable cost per unit. This action will yield the total number of units that have to be sold before you can break even.
For example, if your fixed cost is $10000, the selling price is $100, and the variable cost/unit is $10, divide $10000 by ($100-$10). This step will give you the break-even units point as approximately 111 units.
How To Calculate Break-Even Point For Price
In this method, too, the data is similar to the previous two cases. As always, you need to have an idea of your total fixed cost, selling price, and an estimate for the variable cost. The tool then churns out the individual fixed and variable components that make up your product’s total price.
The tool uses contribution margin and implied variable cost percentages to show you what fraction of your revenue will recoup your initial investment. Based on these results, you can tweak the parameters before actually proceeding with your business plan.
Interpreting The Results
Interpreting the results that the tool gives you is as important as knowing the tool itself. In this section, we will take a look at what precisely the results mean for your business.
Firstly, you must know for what scenario the break-even analysis was done. This understanding has direct implications on the interpretation of the results. Next, we’ll walk you through what all the values mean, based on the scenario.
As mentioned in the how-to section for sales, the value of interest is the total sales (in dollars) that you must generate to break-even. The row titled “Break-Even Price” gives you this figure in dollars. To break even by selling the estimated units, as mentioned by you in the tool, the fixed cost/unit should not exceed the value specified in that row.
Ultimately, this gives you the break-even price, which is the price at which you must sell your goods to recoup your fixed cost with no profit. Every dollar is more than this value nets you a profit. You can use this information to fix your $/unit value or to gauge how much profit you’ll make after breaking even.
Here, the value of interest is the number of units you must sell at a particular price, for you to break-even. The row titled “Break-Even Price” gives you the final result in terms of units that need to be sold.
Selling that many units, given the selling price and variable cost/unit, will ensure that you recoup your fixed cost. Every unit sold beyond that point counts towards your profits. This information is useful to get a picture of whether or not your current selling price is feasible.
When it comes to price, you must consider both fixed and variable costs. They account for all that is being put into the goods, product, or service. The results break down these individual components based on the data you’ve entered. You can use this information to know how much of a profit margin you can carve out for yourself.
The most common use for break-even analysis is to figure out the economic viability of a business proposal. Of course, there are other factors, but this serves as a great litmus test of sorts. On a broad scale, you can get an idea of whether or not a business can generate profits.