Break even analysis is a financial calculation that helps you determine the point at which your total revenues equal your total costs. In simpler terms, it’s the number of units you need to sell (or the amount of revenue you need to generate) to cover all your expenses without making a profit or a loss. Once you pass the break-even point, you start making a profit on each additional sale.
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Break-even Point Formulas
Break-even Point in Units: This tells you how many units you need to sell.
Formula: Break-even Point (Units) = Fixed Costs / (Selling Price per Unit -Variable Cost per Unit)
The denominator (Selling Price per Unit – Variable Cost per Unit) is also known as the Contribution Margin per Unit.
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Break-even Point in Sales Revenue:
This tells you the total amount of money you need to earn from sales.
Formula: Break-even Point (Sales Revenue) = Fixed Costs / ((Selling Price per Unit – Variable Cost per Unit) / Selling Price per Unit)
The denominator here is the Contribution Margin Ratio.
Alternatively, once you have the Break-even Point in Units, you can calculate:
Break-even Point (Sales Revenue) = Break-even Point (Units) * Selling Price per Unit
Example 1: Yohannes – Solar Cookers
- Fixed Costs (FC) per month:
- Workshop Rent: 3000 ETB
- Tools Maintenance/Depreciation: 500 ETB
- Basic Marketing: 500 ETB
Total Monthly Fixed Costs = 4000 ETB
- Per Solar Cooker:
- Selling Price (SP) per unit: 1950 ETB (from pricing module example)
- Variable Cost (VC) per unit (materials, direct labor): 1500 ETB (from pricing module example)
- Calculations:
- Contribution Margin per Unit = SP – VC = 1950 ETB – 1500 ETB = 450 ETB
- Break-even Point (Units) = Total Fixed Costs / Contribution Margin per Unit
= 4000 ETB / 450 ETB/unit = 8.89 units
Since Yohannes can’t sell parts of units, he needs to sell 9 solar cookers per month to break even.
Break-even Point (Sales Revenue) = Break-even Point (Units) * SP
= 9 units * 1950 ETB/unit = 17,550 ETB
Yohannes needs to make 17,550 ETB in sales per month to cover all his costs. Selling the 9th unit means he has covered all fixed costs. Every unit sold after the 9th (e.g., the 10th unit) will contribute 450 ETB directly to profit.