When your business is growing, you are often faced with the decision of whether to
invest in your business such as adding more equipment. Business Break-Even or the
Break-Even Point is one of the ways that business owners use to make this critical
Photo Credits: Clock and Money - Kriss Szkurlatowski
Business Break-Even Calculations & Uses
Business Break-Even is the point at which your income covers your expenses. It is
where you start making money. The Break-Even Point determines how many units you
will need to produce and sell before you begin to make a profit. Here is the formula
for calculating the Break-Even Point:
Break-Even Point = Fixed Costs/(Selling Price Per Unit - Variable Cost Per Unit)
Break-Even Point is taking your fixed costs and dividing them by the the amount of
money left over after subtracting the variable cost per unit from the selling price
If you are below the break even point, you are losing cash. Conversely, if you are
above the break even point, you are generating cash.
Break Even can also be used to calculate the effect from changes in price, fixed
or variable costs, or output.
Example of Business Break-Even
Break-Even Point =
$10,000 Fixed Costs / ($100 Selling Price Per Units - $10 Variable Cost Per Unit)
Break Even Point = 111 Units.
Conclusion and application:
After you have produced and sold 111 units, you will cover
the cost of your investment of $10,000. So if you believe that 111 units are attainable
within a reasonable time frame, then it is a good investment.
However, if you don’t
believe that you can produce and sell 111 units within a reasonable time frame, then
you should not invest in the equipment.