Calculate the point at which your total revenue equals your total costs.
Understanding the Breakeven Point
The breakeven point (BEP) is a crucial concept in business and economics. It represents the level of sales at which a business's total revenue equals its total costs, meaning there is no profit and no loss. Understanding your breakeven point helps in pricing strategies, cost management, and making informed business decisions.
The Formula Explained
The breakeven point can be calculated in two primary ways: in units or in sales dollars.
1. Breakeven Point in Units: This tells you how many units of a product or service you need to sell to cover all your costs.
Formula: Breakeven Point (Units) = Total Fixed Costs / (Selling Price Per Unit – Variable Cost Per Unit)
In this formula:
Total Fixed Costs: These are costs that do not change with the volume of production or sales (e.g., rent, salaries, insurance).
Selling Price Per Unit: This is the price at which each unit of your product or service is sold.
Variable Cost Per Unit: These are costs that vary directly with the volume of production or sales (e.g., raw materials, direct labor per unit, packaging).
The term (Selling Price Per Unit – Variable Cost Per Unit) is also known as the Contribution Margin Per Unit. It represents the amount of revenue from each sale that contributes towards covering fixed costs and generating profit.
2. Breakeven Point in Sales Dollars: This tells you the total revenue needed to cover all your costs.
Formula: Breakeven Point (Sales $) = Total Fixed Costs / Contribution Margin Ratio
Contribution Margin Ratio: Contribution Margin Ratio = (Selling Price Per Unit – Variable Cost Per Unit) / Selling Price Per Unit
The calculator above focuses on the Breakeven Point in Units, which is often the most intuitive for businesses to manage.
Why is the Breakeven Point Important?
Pricing Decisions: Helps determine if current pricing is sufficient to cover costs and achieve profitability.
Cost Control: Highlights the impact of fixed and variable costs on profitability.
Business Planning: Essential for setting sales targets and forecasting potential profits.
Investment Decisions: Aids in assessing the viability of new products or business ventures.
Risk Assessment: Identifies the minimum sales level required for survival.
Example Calculation
Let's say a company has:
Total Fixed Costs: $10,000 (e.g., monthly rent, salaries)
Variable Cost Per Unit: $20 (e.g., materials, direct labor per item)
Selling Price Per Unit: $50 (e.g., the price the item is sold for)
Using the calculator inputs:
Total Fixed Costs = $10,000
Variable Cost Per Unit = $20
Selling Price Per Unit = $50
Calculation:
Contribution Margin Per Unit = $50 – $20 = $30
Breakeven Point (Units) = $10,000 / $30 = 333.33 units
This means the company needs to sell approximately 334 units to cover all its costs. Selling more than 334 units will result in a profit, while selling fewer will result in a loss.
function calculateBreakeven() {
var fixedCosts = parseFloat(document.getElementById("fixedCosts").value);
var variableCostPerUnit = parseFloat(document.getElementById("variableCostPerUnit").value);
var sellingPricePerUnit = parseFloat(document.getElementById("sellingPricePerUnit").value);
var resultDiv = document.getElementById("result");
resultDiv.innerHTML = ""; // Clear previous results
if (isNaN(fixedCosts) || isNaN(variableCostPerUnit) || isNaN(sellingPricePerUnit)) {
resultDiv.innerHTML = "Please enter valid numbers for all fields.";
return;
}
if (fixedCosts < 0 || variableCostPerUnit < 0 || sellingPricePerUnit < 0) {
resultDiv.innerHTML = "Costs and prices cannot be negative.";
return;
}
if (sellingPricePerUnit <= variableCostPerUnit) {
resultDiv.innerHTML = "Selling price per unit must be greater than variable cost per unit to achieve breakeven.";
return;
}
var contributionMarginPerUnit = sellingPricePerUnit – variableCostPerUnit;
var breakevenUnits = fixedCosts / contributionMarginPerUnit;
// Display the result
resultDiv.innerHTML = "Breakeven Point (Units): " + breakevenUnits.toFixed(2) + "";
}