The break-even point is the point at which a company’s total revenue equals its total costs, resulting in neither a profit nor a loss. It can be calculated using the following formula:
Break-even point = Fixed costs / (Price per unit – Variable costs per unit)
In this formula, fixed costs are the expenses that do not change with the level of production or sales, such as rent, salaries, and insurance. Variable costs are expenses that vary with the level of production or sales, such as raw materials and packaging.
Price per unit is the amount that a company charges for each unit of its product or service. It is important to note that this price per unit should cover both fixed and variable costs, as well as provide a profit margin.
Variable costs per unit are the variable costs associated with producing each unit of a product or service. This is calculated by dividing the total variable costs by the total number of units produced.
Once these values are determined, the break-even point can be calculated by dividing the fixed costs by the difference between the price per unit and the variable costs per unit.
For example, let’s say a company has fixed costs of $10,000 per month, a price per unit of $50, and variable costs per unit of $30. Using the formula above, the break-even point can be calculated as:
Break-even point = $10,000 / ($50 – $30) = 400 units
This means that the company needs to sell at least 400 units per month to cover all of its costs and break even. Any sales beyond this point will result in a profit.