Understanding your business’s break-even point is a fundamental budget and cash-flow projection tool. The break-even point is when sales revenue equals total expenses; there is zero profit, but there is also no loss. Any revenue earned after you reach the break-even point is profit for your company.
Determine variable costs per unit and the number of units you expect to produce. Variable costs are expenses that change depending on the number of items produces. For example, if packaging costs $1 per unit and you produce 200 units, your packaging cost is $200; if you produce 500 units, your packaging cost is $500.
Determine fixed costs; these are expenses that stay the same, regardless of how much is produced. For example, rent is a fixed cost. You would pay the same rent each month whether you produce 50 or 2,000 units
Estimate revenue. Multiply the selling price per unit by the number of units that you expect to sell. If you sell more than one type of product and have various price points, divide revenue estimates into product/price categories and add the results from each category to determine your true estimated revenue.
Determine the contribution margin. This is the amount that sales revenue exceeds variable costs. To calculate your contribution margin, subtract total variable costs from expected revenue.
Calculate the break-even dollar amount. Divide fixed costs by the result of dividing the contribution margin by total sales. The equation is set up as: fixed costs / (contribution margin / total sales) = break-even sales revenue
With a background in taxation and financial consulting, Alia Nikolakopulos has over a decade of experience resolving tax and finance issues. She is an IRS Enrolled Agent and has been a writer for these topics since 2010. Nikolakopulos is pursuing Bachelor of Science in accounting at the Metropolitan State University of Denver.