What is the break-even point and how to calculate it

The break-even point is one of the main indicators, which is used to manage the financial state of a business. You can't go below this point. In this new publication on the LLC «ElectraQuix» blog, you will learn what the break-even point is and how to calculate it.

Go to zero

So, what is a break-even point? In simple words, it is when your income equals your expenses, i.e. you have spent the money you receive from your customers on expenses. To put it even more simply: income minus expenses equals zero.

Expenses, or also called costs, are divided into fixed and variable. Fixed costs always remain unchanged and do not depend on the volume of sales and revenue received. They will have to be paid even if the company does not sell anything.

Fixed costs include:

rent;
payment for utilities;
salary (rate);
advertising costs;
communication costs;
others.

Variable costs vary with the quantity of products sold or services rendered. Variable costs include:

materials and raw materials;
purchase cost of goods;
piece rate labour;
transport costs;
others.

If we consider the ratio of revenues and costs on the graph, the intersection of the lines denoting revenue and total costs will be the break-even point. It shows what is the minimum volume of products and how much you need to sell in order not to be at a loss. Anything above the break-even point makes you a profit; anything below it makes you a loss

How to calculate the break-even point

Suppose you own a shop selling T-shirts. The cost of T-shirts - from 10 to 40 conventional units (c.o.). Let's assume that the average cost of selling one T-shirt or the average cheque is 20 c.o. (the average cheque is how much one customer spends on average in the shop). The average purchase price is 10 c.o.o. The markup is 10 c.o.o. or 100%. Fixed costs are 600 c.o.o. Variable costs for 1 T-shirt - 14 c.o. (the cost of selling one T-shirt: 10 c.o. - the purchase price of the T-shirt, 3 c.o. - payment to the seller for each sold T-shirt, 1 c.o. - the cost of delivery from the supplier to the shop).

How many units of goods (in our case - T-shirts) must be sold per month to reach the break-even point? The calculation is made according to the following formula:

Breakeven point = The sum of fixed costs / (the price of 1 unit of goods - the sum of variable costs).

For our example, the calculation would look like this: 600 / (20 - 14) = 100 T-shirts. This means that by selling 100 T-shirts per month, you will recover all your costs.

Now let's find out the break-even point in monetary terms. To do this, multiply the number of T-shirts by the average cost: 100 * 20 c.o.o. = 2000 c.o.o. This money will be enough to cover all your variable and fixed costs, but you will not have a profit. Do you want to make a good profit? Your goal is to sell several times more than your break-even point.

Other important measures of running a business are margin and margins. You can also read about them in our blog: https://electraquix.com.ua/ua/blog/what-is-margin-and-marginality.

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