Calculating the breakeven point is a key financial analysis tool used by business owners.
Once you know the fixed and variable costs for the product your business produces or a good approximation of them, you can use that information to calculate your company's breakeven point. Small business owners can use the calculation to determine how many product units they need to sell at a given price point to break even.
The Breakeven Point
A company's breakeven point is the point at which its sales exactly cover its expenses. To compute a company's breakeven point in sales volume, you need to know the values of three variables:
How to Calculate Breakeven Point
In order to calculate your company's breakeven point, use the following formula:
Fixed Costs ÷ (Price - Variable Costs) = Breakeven Point in Units
In other words, the breakeven point is equal to the total fixed costs divided by the difference between the unit price and variable costs. Note that in this formula, fixed costs are stated as a total of all overhead for the firm, whereas Price and Variable Costs are stated as per unit costs—the price for each product unit sold.
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.