A business reaches breakeven when its income exactly equals its expenses, resulting in $0 net profit.

The ‘break-even point’ of any business is the dollar value of sales the business must achieve to cover its fixed costs or overheads and so achieve a profit of $0. Knowing the breakeven point is helpful in deciding prices, setting sales budgets and preparing a business plan.

The break-even point has important strategic implications as well. The more certain a business is of reaching the breakeven point (due to, say, regular customers, guaranteed or contracted income), the lower the level of business risk. In other words, it is the minimum level of sales the business needs to avoid losing money.

Calculating the break-even point

Break-even (unit sales)* =

Total fixed costs $
______________

Selling price (per unit) – Variable cost (per unit)

* The number of units of goods you need to sell to break even

Break-even ($ sales revenue)**  =

Break-even (unit sales)   X   Selling price (per unit)

** The total value of sales needed to break even                                              

Example of Break-even point

XY Company has:

Selling price (per unit)               $10

Variable cost (per unit)             $4

Total fixed costs                      $1,500

Break-even (unit sales)  =                     

$1,500 / $10 - $4 = 250 units

Any change that reduces selling prices or increases the cost of goods sold or increases fixed costs will increase the breakeven point, so the business needs to make more sales before it will start making a profit.

Conversely, increasing selling prices or reducing fixed costs will reduce the breakeven point, so the business needs to sell less before it makes a profit.