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A practical guide for starting a small business

Business Break Even

Making Smart Decisions Using Break-Even Point

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 decision.

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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)

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.