Break-Even Point Definition
The break-even point is the level of sales at which a company’s revenues equal its costs. In other words, it is the point at which a company’s total expenses are equal to its total revenue. The break-even point is important because it represents the level of sales at which a company is able to cover all of its costs. Beyond the break-even point, a company will begin to generate a profit.
To calculate the break-even point, a company must first determine its fixed costs and variable costs. Fixed costs are those expenses that remain constant regardless of how many units are produced or sold. Variable costs, on the other hand, vary with production or sales volume. Once these costs have been determined, the break-even point can be calculated by dividing the total fixed costs by the unit price minus the variable cost per unit. This formula can be represented as follows:
Break-Even Point = Total Fixed Costs / (Unit Price – Variable Cost per Unit)
For example, assume that Company XYZ has fixed costs of $1 million and variable costs of $0.50 per unit. If Company XYZ wants to earn a profit of $0.10 per unit, it would need to sell its product for $0.60 per unit. Using the formula above, we can calculate that Company XYZ’s break-even point would be 1 million / ($0.60 – $0.50), or 2 million units.
