Breakeven Point  Calculation

Cost-Volume-Profit diagram, decomposing Total Costs as Fixed Costs plus Variable Costs. (Photo credit: Wikipedia)

Your breakeven point is one of the most important numbers that you need to know about your business. A breakeven point can be calculated  for your business or your individual product lines and is even critical in setting your price for the product.

If you accurately know or can forecast your costs and revenues, then calculating your breakeven point is just simple math. The breakeven point for your business is when your total revenues equal your total costs. Your profit is 0 and every sale above this level will produce a profit to the bottom line.

In order to calculate your breakeven point, you will need to know what your costs are and what kind of costs they are, fixed or variable.

Fixed Costs

Fixed costs for the Company are continuing costs no matter if any product is sold or not and are easily estimated.  Examples of fixed costs are rent, salaries, insurance, automobile lease, equipment lease etc. Other examples are fixed costs that may not be completely fixed but are controlled by management and are able to be estimated over the time period. Examples of these are telecommunication, auto operating expenses, office supplies, travel and entertainment etc.

Variable Costs

Variable costs are those costs that are associated with the product or the group of products that your business sells and will increase as you sell more product. Examples of variable costs if you are making a product are manufacturing labour, manufacturing materials, commission paid to a salesman for the sale etc

Now you are ready. Have your most recent monthly financials available for you to “peek” at.

List all of your fixed costs for the month and then total them  These are your Fixed Costs or FC

List all of your variable costs and calculate what % of sales that these represent on a monthly basis. Depending upon how you have set your financial statements up, all or most of your variable costs may be what you consider your costs of sales are. In any case this percentage is your variable cost percentage VC%

Your breakeven point can now be calculated

Let’s say your revenue averaged $10,000 a month for the last 3 months and your variable cost % on this revenue was 60%. Your fixed costs averaged $5,000 for the same monthly period

Breakeven formula  where X is the breakeven revenue required is  X=FC + VC% x X

X = $5,000 + .60X  This means that .40X = $5,000 and X is therefore $12,500

The monthly breakeven point for this business is $12,500 in revenue

Let’s test this;  60% of revenue ($12,500) is variable cost and is $7,500 plus fixed cost of $5,000 brings us to a break even

Now that the business has calculated its’ breakeven point, it can tweak this by looking at the number of units it needs to sell in order to hit this target and adjust prices, adjust some of the fixed costs, adjust the marketing budget or a multitude of other changes to the assumptions.

This same formula can be used to determine pricing strategies when bringing a new product to market.

Need Help?  Contact Denny Mee