Break-Even Analysis: How to Calculate the Break-Even Point

bep definition

Get instant access to video lessons taught by experienced investment bankers. Learn financial statement modeling, DCF, M&A, LBO, Comps and Excel shortcuts. Or, if using Excel, the break-even point can be calculated using the “Goal Seek” function. A break-even analysis provides concrete information, which is a better starting point for business decisions. Our mission is to empower readers with the most factual and reliable financial information possible to help them make informed decisions for their individual needs.

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  • In contrast to fixed costs, variable costs increase (or decrease) based on the number of units sold.
  • This graph is prepared with the variable cost line (instead of fixed cost line) starting at the zero axis.
  • A BEP analysis is vital for meticulously tracking the number (or dollar amount) of sales needed to cover costs.

But this type of analysis also has a wide range of benefits that can help companies make data-driven, forward-thinking business decisions. Assume that an investor pays a $5 premium for an Apple stock (AAPL) call option with a $170 strike price. This means that the investor has the right to buy 100 shares of Apple at $170 per share at any time before the options expire. The breakeven point for the call option is the $170 strike price plus the $5 call premium, or $175. If the stock is trading below this, then the benefit of the option has not exceeded its cost. Fixed expenses are often divided by the gross profit margin to get the breakeven point in a company.

Fixed Costs

The data used in these formula come either from accounting records or from various estimation techniques such as regression analysis. Calculating the contribution margin will allow you to translate this to units (unit sale price less variable costs). How many units are required to break even may be calculated by multiplying the fixed costs by the contribution margin. For a multi-product firm, the BEP is determined by dividing total fixed costs by an average ratio of variable profit (contribution) to sales.

With this knowledge, you can either try to decrease the costs along your supply chain or change the average price you sell your products for. On the other hand, if you’re selling goods with low production costs and want to increase the number of sales, value pricing might be the strategy to go with. In cases where the production line falters, or a part of the assembly line breaks down, the break-even point increases since the target number of units is not produced within the desired time frame. Equipment failures also mean higher operational costs and, therefore, a higher break-even. Instead of returning a BEP in units sold, this equation calculates the exact dollar amount your company would need to generate to break even.

Break-even analysis

Assume an investor pays a $4 premium for a Meta (formerly Facebook) put option with a $180 strike price. That allows the put buyer to sell 100 shares of Meta stock (META) at $180 per share until the option’s expiration date. The put position’s breakeven price is $180 minus the $4 premium, or $176.

💡BONUS TIPThere’s quite a significant relation between the contribution margin and variable costs of your products. As a result of the economies of scale effect, your costs come down, and your margins improve if you increase the sales of your product. That’s why you should always try to negotiate a better price if you buy more raw materials or products from your suppliers, once your sales volume increases. Generally, to calculate the breakeven point in business, fixed costs are divided by the gross profit margin. When it comes to stocks, for example, if a trader bought a stock at $200, and nine months later, it reached $200 again after falling from $250, it would have reached the breakeven point.

Methods to Calculate Break-Even Point

The first is based on the number of units you need to sell to cover all your costs. The second is based on how much revenue you need to generate in order to break-even. Which level you use really depends on whether you just want to understand the profitability of a single product or your entire business. When there is an increase in bep definition customer sales, it means that there is higher demand. A company then needs to produce more of its products to meet this new demand which, in turn, raises the break-even point in order to cover the extra expenses. Break-even analysis is often a component of sensitivity analysis and scenario analysis performed in financial modeling.

  • Sales leaders need to use these numbers as motivational markers to break past breaking even and inspire their sales team to make each quarter count.
  • Break-even analysis is not an effective tool for long-range use and its use should be restricted to the short run only.
  • If each product has the same contribution ratio, the BEP is unaffected by changes in the product-mix.
  • Contrary to fixed costs, variable costs change in with the number of products you sell.

Pumps should be sized as close as possible to its best efficiency point or flow rate. This not only makes the pump more efficient but also improves the reliability of the pump. Note that total efficiency is never realized because of mechanical and hydraulic losses incurred in the pump.

Benefits of a Breakeven Analysis

Read our ultimate guide on white space analysis, its benefits, and how it can uncover new opportunities for your business today. Company V now knows it needs to sell $160,000 worth of vacuums to break even on its quarterly investment. As we can see from the equation, Company V needs to sell 800 vacuum cleaners to break even for Q2. Businesses share the similar core objective of eventually becoming profitable in order to continue operating. Otherwise, the business will need to wind-down since the current business model is not sustainable. In many circumstances, the expenses of any fees, commissions, taxes, and occasionally the impacts of inflation are also factored into the breakeven point calculation.

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