Breakeven Point: Definition, Examples, and How to Calculate

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break even computation

The total variable costs will therefore be equal to the variable cost per unit of $10.00 multiplied by the number of units sold. The break-even point is the volume of activity at which a company’s total revenue equals the sum of all variable and fixed costs. Upon selling 500 units, the payment of all fixed costs is complete, and the company will report a net profit or loss of $0.

Your fixed costs (or fixed expenses) are the expenses that don’t change with your sales volume.
In stock and options trading, break-even analysis helps determine the minimum price movements required to cover trading costs and make a profit.
An unprofitable business eventually runs out of cash on hand, and its operations can no longer be sustained (e.g., compensating employees, purchasing inventory, paying office rent on time).
In effect, the insights derived from performing break-even analysis enables a company’s management team to set more concrete sales goals since a specific number to target was determined.
If you have any other costs tied to the products you sell—like payments to a contractor to complete a job—add them to your cost of goods sold to find your total variable costs.

Your variable costs (or variable expenses) are the expenses that do change with your sales volume. This is the price of raw materials, labor, and distribution for the goods or service you sell. For a coffee shop, the variable costs would be the beans, cups, sleeves, and labor used to produce one cup of coffee. Break-even analysis involves a calculation of the break-even point (BEP). The break-even point formula divides the total fixed production costs by the price per individual unit less the variable cost per unit.

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master’s in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses.

Break Even Point Calculation Example (BEP)

The calculation is useful when trading in or creating a strategy to buy options or a fixed-income security product. What this answer means is that XYZ Corporation has to produce and sell 50,000 widgets to cover their total expenses, fixed and variable. At this level of sales, they will make no profit but will just break even. However, it’s not just a static number to aim for—it’s something you can influence by pulling other levers. For example, you could decrease the required number of subscriptions to break even by reducing the variable costs (like using AI customer service). Consider the following example in which an investor pays a $10 premium for a stock call option, and the strike price is $100.

Methods to Calculate Break-Even Point

break even computation

The break-even point formula can determine the BEP in product units or sales dollars. The denominator of the equation, price minus variable costs, is called the contribution margin. After unit variable costs are deducted from the price, whatever is left—the contribution margin—is available to pay the company’s fixed costs. Break-even analysis helps businesses choose pricing strategies, and manage costs and operations. In stock and options trading, break-even analysis helps determine the minimum price movements required to cover trading costs and make a profit.

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However, costs may change due to factors such as inflation, changes in technology, and changes in market conditions. It also assumes that there is a linear relationship between costs and production. Break-even accounting receipt analysis ignores external factors such as competition, market demand, and changes in consumer preferences. Break-even analysis compares income from sales to the fixed costs of doing business. The five components of break-even analysis are fixed costs, variable costs, revenue, contribution margin, and break-even point (BEP). Your fixed costs (or fixed expenses) are the expenses that don’t change with your sales volume.

How Do Businesses Use the Break-Even Point in Break-Even Analysis?

This margin indicates how much of each unit’s sales revenue contributes to covering fixed costs and generating profit once fixed costs are met. For example, if a product sells for $10 but only incurs $3 of variable costs per unit, the product has a contribution margin of $7. Note that a product’s contribution margin may change (i.e. it may become more or less efficient to manufacture additional goods). Another limitation is that the breakeven point assumes that sales prices, variable costs per unit, and total fixed costs remain constant, which is often not the case.

If the price stays right at $110, they are at the BEP because they are not making or losing anything. Options can help investors who are holding a losing stock position using the option repair strategy. As we can see from the sensitivity table, the how workplace simplicity impacts company results company operates at a loss until it begins to sell products in quantities in excess of 5k. For instance, if the company sells 5.5k products, its net profit is $5k.