A free calculator that automatically computes the breakeven point when fixed and variable costs are entered. It also shows the required sales volume to achieve the target profit.

What is Break-Even Point?

The break-even point is the point where total revenue exactly equals total cost, at which point there is neither profit nor loss. It is an important indicator for determining the minimum quantity or sales amount that a company must produce or sell.

Basic Concepts

Break-even analysis is based on the following three main elements
- Fixed Cost: Costs that occur regardless of production volume (e.g., rent, insurance, equipment depreciation)
- Variable Cost: Costs that vary in proportion to production volume (e.g., raw materials, direct labor, packaging)
- Sales Price: The unit selling price of a product or service

Quantity-based Break-even Point

BEP(Quantity) = Fixed Cost ÷ (Sales Price - Unit Variable Cost)

• 1. Business Decision Making
  • New Business Evaluation: Assessing the likelihood that projected sales will exceed the break-even point
  • Product Line Evaluation: Analyzing profitability by comparing break-even points for each product
  • Equipment Investment Decisions: Analyzing the break-even impact of increased fixed costs and decreased variable costs due to additional equipment investment
• 2. Pricing Strategy
  • Price Setting: Break-even analysis across various price scenarios
  • Discount Policy: Evaluating how increased sales volume due to discounts affects the break-even point
  • Price Differentiation: Setting optimal prices for different market segments
• 3. Cost Management
  • Fixed vs Variable Cost Decisions: Comparing outsourcing (increased variable costs) with in-house production (increased fixed costs)
  • Cost Reduction Impact: Analyzing how various cost-saving alternatives affect the break-even point
  • Workforce Planning: Determining the optimal mix of permanent (fixed cost) and temporary (variable cost) staff
• 4. Goal Setting
  • Sales Target: Setting sales volumes to achieve target profits
  • Performance Measurement: Measuring performance against actual sales volume and break-even point
  • Incentive Structure: Designing incentive systems for sales exceeding the break-even point
• 5. Risk Management
  • Safety Margin Calculation: (Projected Sales Volume - Break-even Sales Volume) / Projected Sales Volume
  • Sensitivity Analysis: Analyzing break-even sensitivity to changes in price, cost, and sales volume
  • Scenario Planning: Break-even analysis in worst/best/base scenarios
• 6. Financial Planning
  • Working Capital Requirements: Forecasting funds needed until the break-even point is reached
  • Investor Persuasion: Demonstrating business viability to investors through clear break-even analysis
  • Loan Planning: Establishing loan repayment plans linked to the break-even point

• Q1: What is the difference between break-even point and margin?
  A: The break-even point is where total revenue equals total cost, resulting in neither profit nor loss. Margin is the ratio of the amount obtained by subtracting cost from selling price, indicating profitability. Generally, a lower break-even point and a higher margin indicate better business profitability.
• Q2: How do you calculate the break-even point when selling multiple products?
  A: For multiple products, use a weighted average contribution margin that considers the product mix (sales ratio). Calculate the average contribution margin by multiplying each products contribution margin by its sales ratio and summing them, then use this to calculate the break-even point.
• Q3: How do you distinguish between fixed and variable costs?
  A: Fixed costs occur consistently regardless of production or sales volume (rent, insurance, salaries, etc.), while variable costs change in proportion to production volume (raw materials, packaging, etc.). In practice, some costs may be difficult to clearly categorize, and its important to consider that all costs can potentially vary in the long term.
• Q4: How does a price increase affect the break-even point?
  A: All else being equal, a price increase raises the per-unit contribution margin, thus reducing the break-even quantity. However, since a price increase may decrease sales volume, the actual effect should consider price elasticity.
• Q5: What are the limitations of break-even analysis?
  A: Break-even analysis has the following limitations:
  • Difficulty in accurately classifying all costs as fixed or variable
  • Selling prices may vary with sales volume
  • Does not account for changes in product mix
  • Does not reflect changes in cost structure over time
  • Does not consider non-linear cost behaviors