What is the break-even point and how to calculate it?
Posted: Mon Dec 23, 2024 10:10 am
The break-even point occurs when any revenue means your business is making a profit. Learn how to calculate the break-even point.
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On this page
What is the break-even point?
How to calculate the break-even point
Factors affecting the break-even point
Frequently asked questions about how to calculate the break-even point
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Many small business owners are wondering when their canadian email address list business will eventually break even. This point is the line between profit and loss, and reaching it is a sign of business viability.
It is therefore understandable that the concept is always on the minds of entrepreneurs, whether their business is just starting out or is on its way to the next stage of growth.
In this article, you will learn how to calculate the break-even point, as well as its definition.
Click here to start selling online right now with Shopify
What is the break-even point?
The break-even point is the stage at which total revenues equal total costs. The result is that neither profit nor loss is generated. It is a fundamental financial indicator, especially for small businesses , as it helps determine the minimum production or sales required to cover fixed and variable costs.
Knowing a business's break-even point can help you make decisions and take actions, such as setting the price of your products and services, determining sales and profitability goals, and managing costs. Potential lenders and investors also look at a business's break-even point when they have to decide whether to approve a loan or invest capital .
Calculating break-even points takes into account three key variables: fixed costs, variable costs, and sales volume.
Fixed costs. These are expenses that do not change, regardless of a business's production or sales volume. These expenses include rent, various utilities, insurance, and payroll. For ecommerce businesses, fees for developing and maintaining a website are also considered fixed costs.
Variable costs. These are costs directly associated with the production of goods or services, which increase or decrease in relation to changes in the quantity of production. Variable costs include raw materials and labor for production.
Sales volume. This is the number of goods or services sold. Volume can be expressed in total money or by the number of units of product sold.
Profit Margin Calculator by Industry
Do you need an effective pricing strategy for your business? First, determine your profit margins. Use Shopify’s profit margin calculator to find a selling price that will allow you to make a profit.
Calculate your margins
How to calculate the break-even point
Companies can calculate their break-even points either in terms of the total amount of sales in euros or by the number of products, called sales per unit.
Let's look at unit sales first. The formula for determining how many units of product must be sold to find the break-even point is:
Break-even point = total fixed costs / (price per unit - variable costs per unit)
Let's take as an example a hypothetical company, ABC Shipfast, which offers a product at a selling price of €200 per unit. Its variable costs for each unit of product are €100, and its fixed costs each quarter are €5,000. The break-even point for that quarter is:
Break-even point = €5,000 / (€200 - €100) = €5,000 / €100 = 50
ABC Shipfast needs to sell 50 products at €200 each to break even in the quarter. If it sells 51 or more, it makes a profit; if it sells 49 or fewer, it incurs a loss.
To determine the break-even point in total sales in euros, the formula is similar, but varies in the denominator:
Break-even point = total fixed costs / (contribution margin per unit / sales price per unit)
Contribution margin is the price of the product less the variable costs per unit, and refers to how much each unit of product sales contributes to the marginal profit of a business, that is, the amount after subtracting production costs.
For example, a product that has €5 in variable production costs and sells for €10 has a contribution margin of €10 - €5 = €5. Another product, also sold for €10, but with €7 in variable costs, has a contribution margin of €3.
In the formula for determining the break-even point in terms of total sales, the denominator is called the contribution margin ratio, which is the contribution margin divided by the sales price per unit.
Taking the same example of ABC Shipfast, the contribution margin is €100 (€200 price per unit minus €100 cost per unit). So the contribution margin ratio is €100 divided by €200, i.e. 0.5. Therefore, the quarterly break even point for ABC Shipfast on Euro sales is:
Break-even point = €5,000 / (€100 / €200) = €5,000 / 0.5 = €10,000
This break-even sales calculation shows that if ABC Shipfast’s sales exceed €10,000 in the quarter, the company will start making a profit. Below €10,000, it incurs a loss.
Factors affecting the break-even point
Price of the product or service
Turnover
Changes in fixed or variable costs
There are several factors that affect a business’s break-even point. Let’s consider our hypothetical case of ABC Shipfast to examine three of them:
purple background
On this page
What is the break-even point?
How to calculate the break-even point
Factors affecting the break-even point
Frequently asked questions about how to calculate the break-even point
Start your online business today.
For free.
Free trial
Many small business owners are wondering when their canadian email address list business will eventually break even. This point is the line between profit and loss, and reaching it is a sign of business viability.
It is therefore understandable that the concept is always on the minds of entrepreneurs, whether their business is just starting out or is on its way to the next stage of growth.
In this article, you will learn how to calculate the break-even point, as well as its definition.
Click here to start selling online right now with Shopify
What is the break-even point?
The break-even point is the stage at which total revenues equal total costs. The result is that neither profit nor loss is generated. It is a fundamental financial indicator, especially for small businesses , as it helps determine the minimum production or sales required to cover fixed and variable costs.
Knowing a business's break-even point can help you make decisions and take actions, such as setting the price of your products and services, determining sales and profitability goals, and managing costs. Potential lenders and investors also look at a business's break-even point when they have to decide whether to approve a loan or invest capital .
Calculating break-even points takes into account three key variables: fixed costs, variable costs, and sales volume.
Fixed costs. These are expenses that do not change, regardless of a business's production or sales volume. These expenses include rent, various utilities, insurance, and payroll. For ecommerce businesses, fees for developing and maintaining a website are also considered fixed costs.
Variable costs. These are costs directly associated with the production of goods or services, which increase or decrease in relation to changes in the quantity of production. Variable costs include raw materials and labor for production.
Sales volume. This is the number of goods or services sold. Volume can be expressed in total money or by the number of units of product sold.
Profit Margin Calculator by Industry
Do you need an effective pricing strategy for your business? First, determine your profit margins. Use Shopify’s profit margin calculator to find a selling price that will allow you to make a profit.
Calculate your margins
How to calculate the break-even point
Companies can calculate their break-even points either in terms of the total amount of sales in euros or by the number of products, called sales per unit.
Let's look at unit sales first. The formula for determining how many units of product must be sold to find the break-even point is:
Break-even point = total fixed costs / (price per unit - variable costs per unit)
Let's take as an example a hypothetical company, ABC Shipfast, which offers a product at a selling price of €200 per unit. Its variable costs for each unit of product are €100, and its fixed costs each quarter are €5,000. The break-even point for that quarter is:
Break-even point = €5,000 / (€200 - €100) = €5,000 / €100 = 50
ABC Shipfast needs to sell 50 products at €200 each to break even in the quarter. If it sells 51 or more, it makes a profit; if it sells 49 or fewer, it incurs a loss.
To determine the break-even point in total sales in euros, the formula is similar, but varies in the denominator:
Break-even point = total fixed costs / (contribution margin per unit / sales price per unit)
Contribution margin is the price of the product less the variable costs per unit, and refers to how much each unit of product sales contributes to the marginal profit of a business, that is, the amount after subtracting production costs.
For example, a product that has €5 in variable production costs and sells for €10 has a contribution margin of €10 - €5 = €5. Another product, also sold for €10, but with €7 in variable costs, has a contribution margin of €3.
In the formula for determining the break-even point in terms of total sales, the denominator is called the contribution margin ratio, which is the contribution margin divided by the sales price per unit.
Taking the same example of ABC Shipfast, the contribution margin is €100 (€200 price per unit minus €100 cost per unit). So the contribution margin ratio is €100 divided by €200, i.e. 0.5. Therefore, the quarterly break even point for ABC Shipfast on Euro sales is:
Break-even point = €5,000 / (€100 / €200) = €5,000 / 0.5 = €10,000
This break-even sales calculation shows that if ABC Shipfast’s sales exceed €10,000 in the quarter, the company will start making a profit. Below €10,000, it incurs a loss.
Factors affecting the break-even point
Price of the product or service
Turnover
Changes in fixed or variable costs
There are several factors that affect a business’s break-even point. Let’s consider our hypothetical case of ABC Shipfast to examine three of them: