Break-Even Point printable pdf download

Break-even point

Many people in business are not aware of the vital importance of the break-even point and how

they should calculate it.

The break-even point is that point at which business covers its costs and thus breaks even. It tells

you exactly how much you must sell at the present level of costs in order to avoid making a loss

and it can be used regularly to check the progress of your business by comparing sales achieved

with the break-even point. To correctly arrive at your business break-even point the details as to

fixed cost and variable cost on which it is based must be accurate.

Calculation of the break-even point

To calculate your break-even point you must first look at the cost of running your business. There

are 2 types of cost - variable and fixed.

1. Variable costs

Variable costs are directly related to the volume of sales. This means that these costs increase in

proportion to the increase in your sales and vice-versa. For example, if your variable costs total

$100 and your total sales equal $1,000 then the variable cost percentage is 10%. This means that

for every $1 worth of sales 10 cents is spent on buying or producing those goods and services.

The amount you have left therefore in this example is 90 cents and this figure is called the

contribution towards fixed costs.

2. Fixed costs

Fixed costs continue regardless of how much you sell or don’t sell. These can be made up of such

expenses as rent, depreciation, telephone accounts, insurance etc. These costs can be estimated

usually from using last year’s figures as a basis because they typically do not change. It is

important also to include here the salary for the owner/operator as another fixed cost to arrive at

the total business fixed costs.

Break-even formula

The formula for the calculation for the break-even point is therefore as follows (in this case, fixed

costs are $60,000):

Fixed costs

$60,000 = $66,666 Break-even Point Sales

(Sales less Variable Cost)%

90%

If you sell this amount you will have covered all your costs and earned your salary but at this stage

you have not made any profit. That is, you have broken even and any margin over and above any

further variable or direct cost is a contribution towards profit.

Break-Even Point