An increase in a company's break-even can occur for many reasons, including an increase in fixed costs, an increase in variable expenses, a change in product mix or a decrease in sales price. The break-even point is the lowest price a company can charge for a product without losing money. From an income statement perspective, break-even point is gross profit, or sales minus the cost of those sales. From a contribution margin perspective, break-even point is the price that covers fixed costs and expenses.

Break-Even Defines Operational Strategy

Many bankers and investors look to gross profit as a proxy for break-even point on the income statement. The higher your gross profit, the more flexibility you have in terms of product delivery and customer base. That said, a high gross profit translates into a low break-even point. Companies with low break-even points can afford to take a risk on projects with a potentially high reward. A company with a high break-even point has little room for error and must avoid all risk.

Break-Even Example

As an example, assume you have a product with fixed costs of $50,000. The product has variable costs calculated to be $0.50 per unit and product costs of $5. The formula for calculating break even is: Fixed Costs/Price - Variable Costs. In this example, the fixed costs are $50,000, the price is $5, and the variable costs are $.50 per unit. The calculation is as follows: $50,000/$5 - $0.50 = 11,111 break-even units. This means you must produce 11,111 units to cover fixed and variable costs.

Increase In Fixed Costs

The most common reason for an increase in break-even point is an increase in fixed costs. These are costs you must pay regardless of the level of volume sold. In order to break even, you must at least sell enough units to cover fixed costs. An increase in fixed costs, such as rent, salaries and utilities, can increase your break-even point. The opposite of fixed costs are variable costs. These are costs that change with the level of volume.

Increase In Variable Costs

Contribution margin is sales minus variable costs. If variable costs increase, without an equivalent increase in revenues, the break-even point will increase to make up for the loss. That means you will need to sell more units to cover fixed costs. A change in product mix can also increase the break-even point, especially if the average contribution margin falls.