Calculating the break-even point can help you estimate revenues that a business will need to generate to cover fixed costs. Here are some examples of when you might use the BEP: It's a tool you can use at any time during your business journey to understand when one of your business’s products will start to be profitable. The break-even point isn't a static calculation. The cosmetic company must generate $379,746 in lipsticks sales dollars to break even. They know their fixed costs are $300,000, so they just need to figure out their contribution margin.Ĭontribution Margin = (Sales Price Per Unit − Variable Costs Per Unit) ÷ Sales Price Per UnitĬontribution Margin = ($10.95/lipstick − $2.25/lipstick) ÷ $10.95/lipstickĬontribution Margin = $8.70/lipstick ÷ $10.95/lipstickīreak-Even Point = Fixed costs ÷ Contribution Margin This calculation tells you how much money you need to make from the sale of a certain product to break even.īreak-Even Point = Fixed Costs ÷ Contribution Marginįor example, the same cosmetic company wants to determine how much money they need to make from the sale of lipsticks to break even. Calculating the break-even point in sales dollars The cosmetic company needs to sell 34,483 lipsticks to break even.Ģ. The current sales price for one lipstick is $10.95 and the current variable cost to sell one lipstick is $2.25.īreak-Even Point = $300,000 ÷ ($10.95/lipstick − $2.25/lipstick)īreak-Even Point = $300,000 ÷ $8.70/lipstick Their fixed costs, including bills, payroll and rent, total $300,000. This calculation tells you how many units of a single product you need to sell to break even.īreak-Even Point = Fixed Costs ÷ (Sales Price Per Unit − Variable Costs Per Unit)įor example, a cosmetic company wants to know how many lipsticks from their line they have to sell to break even. Calculating the break-even point in units There are two common ways to calculate the break-even point based on your needs: in units or sales dollars.ġ. Contribution margin: the difference between the sales price per unit and the variable cost per unit.Variable costs per unit: variable costs for each unit, as opposed to the total variable costs.Sales price per unit: the price at which your unit or service will sell to customers for each individual product.Variable costs: expenses that fluctuate in proportion to production output or sales (e.g., materials and shipping).Fixed costs: costs that do not change with sales or volume, with little fluctuation (e.g., monthly rent or interest payments).Let's go over how to calculate a break-even point using two different methods.īefore you calculate your BEP, you need to understand a few basic financial terms used in the formula: It's also a useful figure to keep in mind when managing prices, operating costs and overhead. The break-even point is more than the moment when you pop a celebratory bottle of champagne. Calculating the break-event point (BEP) is a useful tool to determine when your product will become profitable. The BEP is the point at which your total costs and total revenue are equal. Turning a profit is the goal of every business, but it doesn't happen overnight.
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