We are not to be held responsible for any resulting damages from proper or improper use of the service. The break-even point is an extremely important starting goal to work towards. No matter whether you are a business owner, accountant, entrepreneur or even a marketing specialist – you will often come across this metric, which is why our online calculator is so handy. Also, remember that this analysis doesn’t take into consideration the present vs. future value of your funds. See the time value of money calculator for more information about this topic. An unprofitable business eventually runs out of cash on hand, and its operations can no longer be sustained (e.g., compensating employees, purchasing inventory, paying office rent on time).
Importance of Break-Even Point Analysis
Andy Smith is a Certified Financial Planner (CFP®), licensed realtor and educator with over 35 years of diverse financial management experience. He is an expert on personal finance, corporate finance and real estate and has assisted thousands of clients in meeting their financial goals over his career.
What is a Break-Even Point and How to Calculate
It’s important to recalculate BEP when any major shifts occur in your business. Alternatively, the break-even point can also be calculated by dividing the fixed costs by the contribution margin. If your sales price is too low, you might have to sell too many units to break even. And as much as we think a lower price means more buyers, studies actually show that consumers rely on price to determine the quality of a product or service. What this answer means is that XYZ Corporation has to produce and sell 50,000 widgets to cover their total expenses, fixed and variable. At this level of sales, they will make no profit but will just break even.
Break-Even Point Formula and Analysis: How to Calculate BEP for Your Business
Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master’s in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem. We thoroughly evaluate each company and product we review and ensure our stories meet our high editorial standards.
- Lower variable costs equate to greater profits per unit and reduce the total number that must be produced.
- Quantifying those components correctly allows you to identify areas where you may be able to cut costs.
- The break-even point allows a company to know when it, or one of its products, will start to be profitable.
Start ups are exciting, but demand a lot of planning, attention and consistent effort. At the same time, it is essential too think realistically when starting up a new venture. Break even point analysis is an important step variable cost definition part of planning any start up. It is that point of time when your business has generated enough revenue to cover your initial cost. It also covers any fixed and variable costs incurred on a monthly basis.
Our goal is to deliver the most understandable and comprehensive explanations of financial topics using simple writing complemented by helpful graphics and animation videos. This team of experts helps Finance Strategists maintain the highest level of accuracy and professionalism possible. It is only useful for determining whether a company is making a profit or not at a given point in time. The break-even point or cost-volume-profit relationship can also be examined using graphs. Sales below the break-even point mean a loss, while any sales made above the break-even point lead to profits.
The contribution margin represents the revenue required to cover a business’ fixed costs and contribute to its profit. With the contribution margin calculation, a business can determine the break-even point and where it can begin earning a profit. A lower BEP is ideal for businesses with high fixed costs, as it means you can cover your expenses with fewer sales.
You can see that all of these costs do not change even if you increase production or make more sales in a particular month. Variable costs are the costs that are directly related to the level of production or number of units sold in the market. Variable costs are calculated on a per-unit basis, so if you produce or sell more units, the variable cost will increase. Some common examples of variable costs are commissions on sales, delivery charges, and temporary labor wages. In other words, the breakeven point is equal to the total fixed costs divided by the difference between the unit price and variable costs. Note that in this formula, fixed costs are stated as a total of all overhead for the firm, whereas price and variable costs are stated as per unit costs—the price for each product unit sold.