A company reaches the break-even point when sales revenue exceeds costs.
In other words, the break-even point is when the company stops making losses and becomes a profitable business. There are two main ways to calculate this value:
Break-even point by sales volume : This is mainly used to determine the amount of income you need to generate. For example, €10,000 per month.
Break-even point per unit price: This lets you know the quantity of products you need to sell to be profitable. For example, 100 units per month.
With this in mind, let's look at the break-even point formula and how to calculate it in both cases.
Break-even formula
To understand the break-even point formula in a simple way, we are going to use a simple and practical example.
A practical example: a shoe factory
Imagine that a businessman has a small street-level business that makes shoes. In this business, there are several income and expenses to take into account:
Monthly fixed costs ( FIXED COST ): are the expenses that the business has every month, regardless of the amount of sales. An example of this is the rent of the premises, the telephone line, or the electricity bill.
Your variable costs ( VARIABLE COST ): Variable costs are those that depend on the volume of business. For example, the materials to produce a shoe or the shipping costs of the product.
The unit sales price ( PRICE ): is the value for which the product is sold, in this case a shoe.
Profit margin ( MARGIN ): The profit margin is the money left over once a shoe is sold and variable costs are subtracted from the sales price.
The numbers
Let's assume that in our example the values are the following, in order to then calculate the profitability threshold:
Fixed cost: €2400/month
Variable cost: €20/shoe
Sale price: 50€/shoe
Profit margin: €30/shoe (Price - cost)
With these numbers in hand, let's calculate the break-even point in sales volume and unit sales.
Achieving profitability in sales
As we have said before, the break-even point in sales volume is thailand code phone number the amount of revenue that must be generated to cover expenses. The formula to calculate this value is as follows:
FIXED COST / (PRICE - VARIABLE COST)
or
FIXED COST / PROFIT MARGIN
Here we are dividing the monthly fixed costs by the profit we get from each sale. Remember that the profit margin is obtained by subtracting the variable costs from the sales price of a single product-- that is, it is the money we have left after each sale.
Applying our example, we have the following:
€2400 / ( €50 - €20 ) = 80 units
As a result, we see that each month we have to sell 80 units in our business in order to be profitable. This would be the profitability threshold by unit sales volume.
Furthermore, having this value we can now multiply it by the sales price and know how much sales must be generated to be profitable:
80 pcs x 50€ = 4000€
In other words, our business must sell at least €4,000 per month to stay afloat. From this figure (80 products or €4,000 in sales), we have passed the break-even point and can start generating profits consistently.