## Breakeven Point

### What is the Breakeven Point?

Companies often need to identify how much sales in dollars or how many sales in units they need to reach, in order to start making a profit.  From this, finance and economics scholars have created an equation to identify the breakeven point for business.  The breakeven point is a popular finance concept used to determine the number of units a business must sell in order to break even.  In other words, the breakeven formula will help business owners understand how many units they need to sell in order to not make a profit and not incur a loss.  Further, the formula can be manipulated to incorporate a baseline profit into the equation.  Finally, with just a few more changes, a company can identify the dollar amount of sales needed to break even.

The breakeven formula is a pretty straightforward formula, which is:

• Units = Fixed Costs/ (Sales – Variable Costs).

The solution to the equation gives a business owner the number of units needed to break even.  As previously stated, the formula may also be manipulated to incorporate a baseline profit for the company.  In this situation, the formula would be as follows:

• Units = (Fixed Costs + Profit) / (Sales – Variable Costs).

By incorporating profit into the formula, a business owner is able to identify a target profit and then determine the number of units that needs to be sold in order to achieve their objectives.  However, business owners tend to understand dollar figures as compared to unit sales.  Further, most businesses sell more than one type of product.  From this, identifying the dollar sales needed, instead of units, requires one simple additional step.

• Unit * Sales price = Dollar Sales Needed.

This step may be applied to either formula to determine the dollar sales needed to achieve either the breakeven point or the breakeven point plus a baseline profit.

### Breakeven Point Template and Calculator

This template will allow students to solve for different components of the profit equation, breakeven point, contribution margin and contribution margin ratio.

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### Step by Step Break-Even Point Explained:

#### Break- Even Point Terminology:

Before an in-depth review of the breakeven point is conducted, examination of terminology used when dealing with the breakeven point is needed.

• Fixed Costs - The fixed costs our cost that do not change on a monthly or annual basis.
• Variable cost - the variable cost are only incurred by a company when the unit is sold.
• Sales price - this is the price one unit is sold for.
• Contribution margin - the contribution margin is the dollar amount that may be applied to reducing fixed cost.
• Contribution margin ratio - the contribution margin ratio measures the incremental income produced by an additional dollar of sales.
• Margin of safety - the margin of safety is the difference between the expectations a business owner has for sales and a breakeven dollar amount for sales.
• Profit equation - the profit equation helps business owners identify profits using sales price, variable costs, and fixed costs

#### Break Even Point - Step by Step:

Solving the breakeven point is pretty straightforward once all variables are found.  For the numerator, FC is the fixed cost.  And the denominator, SP is sales price and VC is variable cost.  To solve the equation, start with the denominator.  Subtract sales price from variable costs.  This answer is also considered to be the contribution margin.  Finally, divide the fixed cost by the contribution margin.  The answer is the number of units that needs to be sold in order to breakeven.