8/30/22, 8:30 PM Break-Even Point (BEP): Formula and Calculator [Excel Template]

What is the Break-Even Point?

The Break-Even Point is the necessary level of output for a company’s
revenue to be equal to its total costs – or said differently, the inflection
point at which a company begins to generate a profit.

 In This Article

What is the purpose of conducting a break-even analysis?
How can the “Goal Seek” function in Excel be used to calculate the
break-even point?
Which formula could you use to calculate the break-even point?
What are some of the types of insights that can be derived from
conducting break-even analysis?

How to Calculate the Break-Even Point

For all businesses owners, particularly during the earlier stages of a
business, one of the most crucial questions to answer is: “When will my
business break-even?”

All businesses share the similar goal of eventually becoming profitable in

order to continue operating.

An unprofitable business eventually runs out of cash on hand, and its

operations can no longer be sustained (e.g., compensate employees,
purchase inventory, office rent).

By understanding the required output to break even, a company can

set revenue targets accordingly, as well as adjust its business strategy such
as the pricing of its products/services and how it chooses to allocate its
capital.

If a company has reached its break-even point, this means the company
is operating at neither a net loss nor a net gain (i.e., “broken even”).

All incremental revenue beyond this point contributes toward the

accumulation of more profits for the company.

Conducting a break-even analysis is a prerequisite to setting prices

appropriately, establishing clear and logical sales target goals, and

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identifying weaknesses in the current state of the business model that

could benefit from improvements (e.g., sales tactics, marketing strategy).

Furthermore, established companies with a diverse portfolio of

product/service offerings can estimate the break-even point on an
individualized product-level basis to assess whether adding a certain
product would be economically viable.

In effect, this enables setting more concrete sales goals as you have a
specific number to target in mind.

Break-Even Point Formula

The formula for calculating the break-even point involves taking the
total fixed costs and dividing the amount by the contribution margin per
unit.

To take a step back, the contribution margin is the selling price per unit
minus the variable costs per unit, and this metric represents the amount
of revenue remaining after meeting all of the associated variable costs
accumulated to generate that revenue.

That said, when a company’s contribution margin (in dollar terms) is equal
to its fixed costs, the company is at its break-even point.

If its contribution margin exceeds its fixed costs, then the company
actually starts profiting from the sale of its products/services.

BEP Formula
Break-Even Point = Fixed Costs / Contribution Margin ($)

Example Break-Even Analysis Calculation

For example, if a company has $10,000 in fixed costs per month, and their
product has an average selling price (ASP) of $100, and the variable cost is
$20 for each product, that comes out to a contribution margin per unit of
$80.

Then, by dividing $10k in fixed costs by the $80 contribution margin,

you’ll end up with 125 units as the break-even point. This means that if
the company sells 125 units of its product, it’ll have made $0 in net profit.

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Or, if using Excel, the break-even point can be calculated using the “Goal
Seek” function.

After entering the end result being solved for (i.e., the net profit of zero),
the tool determines the value of the variable (i.e., the number of units that
must be sold) that makes the equation true.

Break-Even Point Calculator – Excel Template

We’ll now move to a modeling exercise, which you can access by filling
out the form below.

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Break-Even Point Analysis Example (“Goal

Seek”)
Let’s say that we have a company that sells products priced at $20.00 per
unit, so revenue will be equal to the number of units sold multiplied by
the $20.00 price tag.

In terms of its cost structure, the company has fixed costs (i.e., constant
regardless of production volume) that amounts to $50k per year.

Recall, fixed costs are independent of the sales volume for the given
period, and include costs such as the monthly rent, the base employee
salaries, and insurance.

Moving onto our final assumption, the variable costs directly associated
with the production of the products being sold are $10.00.

In contrast to fixed costs, variable costs increase (or decrease) based on

the number of units sold. If customer demand and sales are higher for the
company in a certain period, its variable costs will also move in the same
direction and increase (and vice versa).

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The total variable costs will therefore be equal to the variable cost per unit
of $10.00 multiplied by the number of units sold.

We now have the assumptions in place to use the “Goal Seek” function in
Excel (Alt ➝ A ➝ W ➝ G).

1. First, we link to the net profit cell for the “Set cell” selection

2. In the subsequent step, we are going to input zero as the “To value”
since the profit we are targeting is $0 (i.e., the break-even point)

3. Lastly, the “By changing cell” will be set to the number of units sold, as
this is the variable that Excel will be adjusting until our target profit
value is met

Upon doing so, the number of units sold cell changes to 5,000 and our
net profit is equal to zero, as shown below in the screenshot of the
finished solution.

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Quantifying the required number of units to be sold to have a net profit of

zero was our intended goal, which in this particular scenario, the company
must sell 5k units of its products to break even and start to generate a
profit from its operations.

As we can see from the sensitivity table, the company operates at a loss
until it begins to sell products in quantities in excess of 5k. For instance, if
the company sells 5.5k products, its net profit is $5k.

Alternatively, the break-even point can also be calculated by dividing the

fixed costs by the contribution margin.

The total fixed costs are $50k and the contribution margin ($) is the
difference between the selling price per unit and variable cost per unit.

So, after deducting $10.00 from $20.00, the contribution margin comes
out to $10.00.

And just like the output for the goal seek approach in Excel, the implied
units needed to be sold for the company to break even comes out to 5k.

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