1. What Is the Break Even Point?
The break even point is where your total revenue equals total costs, meaning you’re not making a profit, but also not losing money. It’s a crucial calculation for understanding business viability and financial planning.
2. The Formula for Break Even Point (Units)
The standard formula to calculate the break even point in units is:
Break Even Point (Units) = Fixed Costs ÷ (Selling Price per Unit – Variable Cost per Unit)
- Fixed Costs: Costs that do not change with sales (e.g., rent, salaries)
- Selling Price per Unit: The price you charge for one product or service
- Variable Cost per Unit: Costs that vary with each unit sold (e.g., materials, packaging)
3. Break Even Point in Sales Revenue (£)
If you want the break even point in revenue rather than units:
Break Even Point (Revenue) = Break Even Units × Selling Price per Unit
OR
Break Even Point (Revenue) = Fixed Costs ÷ Contribution Margin Ratio
Where:
Contribution Margin Ratio = (Selling Price – Variable Cost) ÷ Selling Price
4. Example Calculation
Let’s say:
- Fixed Costs = £5,000
- Selling Price per Unit = £50
- Variable Cost per Unit = £30
Break Even Point = £5,000 ÷ (£50 – £30) = 250 units
This means you must sell 250 units to break even.
To find the revenue:
Break Even Revenue = 250 units × £50 = £12,500
5. Why Break Even Analysis Matters
- Helps set realistic sales targets
- Assists in pricing strategy decisions
- Identifies minimum performance for profitability
- Essential for startup planning and investor discussions
Frequently Asked Questions
1. What are fixed vs variable costs?
Fixed costs stay the same regardless of sales. Variable costs change with each unit sold.
2. Can I use this formula for services, not products?
Yes, as long as you can define a unit (e.g., 1 hour of service) and its variable cost.
3. What if my business sells multiple products?
You’ll need to calculate a weighted average contribution margin based on your product mix.
4. Is the break even point a one-time calculation?
No. Update it regularly as prices, costs, or business conditions change.
5. What happens after the break even point?
Sales beyond that point generate profit, since fixed costs are already covered.
6. Can break even analysis help with funding?
Yes. Lenders and investors often ask for it to assess risk and sustainability.
Conclusion
Understanding the formula for break even point helps you assess the financial health of your business. It’s a foundational tool for pricing, planning, and profit forecasting. Calculate it often and use it to guide your key decisions.