Break even point calculation

When evaluating any business project, it is extremely important to understand at what sales volumes the project will start to make a profit. The break-even point is the first line on the way to the project payback and return on investment. If the project is unprofitable (that is, the break-even point has not been reached), then you can not even think about the return on investment.
The break-even point (or break-evenpoint — BEP) is the sales volume (or revenue) at which the project’s profit is zero. Those. at this volume, the business is not yet making a profit, but it is no longer generating losses.
In what situations is it useful to calculate the break-even point?

You can calculate the break-even point in 5 minutes on our website online:

Why do you need to calculate the break-even point in practice?

The calculation of the break-even point is one of the most useful and necessary knowledge in practice. Unlike most financial analysis ratios, which are used not by acting entrepreneurs, but only by financial analysts, knowing the break-even point of your business is necessary precisely in practice.

Calculating the break-even point is extremely useful in the following situations:

1. At the very beginning, at the start of a new project. It’s no secret that new business projects need to be promoted, i.e. increase revenue and sales. Most «startups» in the first months bring a loss instead of profit. The transition from the loss zone to the profit zone is a very important milestone in the implementation of any business project. As a rule, the break-even point is calculated even when planning a project — at the stage of writing a business plan.
2. In a crisis or recession, in order to understand how much sales can fall. Every business goes through a recession sooner or later. And at this moment it is important to know how much you can “fall” so as not to go back from the profit zone to the loss zone.

Division of costs into fixed and variable

Before calculating the break-even point, it is important to divide all costs into fixed and variable:

Fixed costs are those whose value does not change when the volume of sales changes. For example:

• rental of premises;
• depreciation;
• salary part of wages;
• equipment maintenance costs…

When assigning costs to the “fixed” group, it is important to understand that the amount of costs will not change significantly, even if sales increase (or decrease) by 2, 5 or even 10 times.

Variables — costs, the value of which is directly related to the volume of output (sales of goods or services). These expenses typically include:

• costs of raw materials and materials used in the course of production;
• piecework wages of key personnel;
• piecework payroll…

The bottom line is simple — in order to sell 10 ballpoint pens, I had to buy them first. If I pay 2 rubles for each unit of goods produced, then if I produce 10 units, I will pay $20, and if I produce 100 units, I will pay $200.
Attention! The same cost item can relate to both variable and fixed costs.
For example, wages can be both variable and fixed costs, depending on which base serves as the basis for accrual:

• with a piecework system — the volume of output (variable costs);
• with a time-based system — the time spent at work (fixed costs)

Algorithm for calculating the break-even point in physical terms

In order to calculate the break-even point of your project or business in physical terms, you need to know the following:

1. The amount of fixed costs per month (FC– fixedcost);
2. The price of a product (or service) (P– price);
3. Average variable cost per unit of output (AVC– averagevariablecost)

The formula for calculating the break-even point in physical terms:

BEP=FC/(P-AVC)

The essence of the calculation can be disassembled on a conditional example and a very simplified example.

Introductory:

You rent a warehouse for $30,000 per month. Apart from rent, you have no fixed costs. From the warehouse, you sell a single product — shovels at $100 per item. At the same time, the purchase price of shovels is $70.

Calculation of the break-even point (TB):

TB=30,000/(100-70)=1000 units

Conclusion:

In order to recoup the rent (fixed costs) it is required to sell at least 1000 units of goods (shovels), provided that the markup on each shovel is $30.
The essence of calculating the break-even point in physical terms is to determine how many units of goods must be sold in order to recoup the fixed costs of the business.

Algorithm for calculating the break-even point in monetary terms

In practice, enterprises sell dozens, hundreds and even thousands of units of goods (services). In such a situation, the calculation of the break-even point in physical terms becomes meaningless. For such situations, we apply the calculation of the break-even point in monetary terms.

In monetary terms, it is even easier to calculate the break-even point. In order to calculate the break-even point of your project or business in monetary terms, you need to know the following:

1. Monthly revenue (TR–totalrevnue);
2. The amount of variable costs per month (VC — variablecost);
3. The amount of fixed costs per month (FC — fixed cost)

The calculation of the break-even point itself must be carried out in 2 stages:

1. Calculate the contribution margin ratio (KMR).

Let us introduce the following concepts:

Marginal Income (MR)=Monthly Revenue (TR) — Monthly Variable Cost Sum (VC)

MR=TR-VC

Marginal Income Ratio (KMR) = Marginal Income (MR) / Monthly Revenue (TR)

KMR=MR/TR

2. Calculate the break-even point in monetary terms:

BEP=FC/KMR

Let’s continue with our simple example:

Introductory:

You rent a warehouse for $30,000 per month. Apart from rent, you have no fixed costs. From the warehouse you sell the only product — shovels. Last month’s revenue was $120,000 and variable expenses were $84,000.

Calculation of the break-even point (TB):

KMR \u003d (120,000 — 84,000) / 120,000 \u003d 0.3

TB=30,000/0.3=100,000 dollars

Conclusion:

In order to recoup the rent (fixed costs) it is required to sell at least $100,000 worth of goods, provided that the marginal income is 30% of the selling price.
It is easy to see that the calculation of the break-even point in physical and monetary terms gave the same results: 1000 units x $100 per unit = $100,000 in revenue

Break-even point calculation example

I propose to consider another example of calculating the break-even point, where all the numbers are based on real, not fictional data.

Introductory:

The business plan for opening a retail store assumes that by the tenth month of the project, the average check will be $230. The average mark-up of the retail price on the purchase price of the goods is 43%. The amount of fixed costs (including utility costs, sales salaries, taxes, accounting expenses …) is $72,776 per month.

Calculation of the break-even point (TB):

1. Marginal income (MR) from one sale on average = 230 x 43/143 = 69 dollars
2. Marginal income ratio (КMR)=69/230=0.3
3. Break-even point (TBden) in monetary terms \u003d 72,776 / 0.3 \u003d $ 242,586
4. Break-even point (TBnat) in kind=242,586/230=1055 sales per month

Conclusion:

In order for the store to be able to cover all fixed costs and operate without loss, it is necessary to achieve a revenue level of $ 242,586 per month. Provided that the average check is about $ 230, at least 1055 customers must be served per month, on average 35 customers per day.

On our website you can easily calculate the break-even point of a project. To do this, you can follow the link below. You can read instructions on how to use the calculation here .

Good luck with your business!