![]() ![]() 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). In contrast to fixed costs, variable costs increase (or decrease) based on the number of units sold. Moving onto our final assumption, the variable costs directly associated with the production of the products being sold are $10.00. 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. ![]() In terms of its cost structure, the company has fixed costs (i.e., constant regardless of production volume) that amounts to $50k per year. 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. Unit Economics and Cost Structure Assumptions We’ll now move to a modeling exercise, which you can access by filling out the form below. Or, if using Excel, the break-even point can be calculated using the “Goal Seek” function.Īfter 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. Then, by dividing $10k in fixed costs by the $80 contribution margin, you’ll end up with 125 units as the break-even point, meaning that if the company sells 125 units of its product, it’ll have made $0 in net profit. ![]() Contribution Margin > Fixed Costs → If the company’s contribution margin exceeds its fixed costs, then the company actually starts profiting from the sale of its products or services.īreak Even Point Calculation Example (BEP)įor 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.Contribution Margin = Fixed Costs → 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.To take a step back, the contribution margin is the selling price per unit minus the variable costs per unit, and represents the amount of revenue remaining after meeting all the associated variable costs accumulated to generate that revenue. The formula for calculating the break-even point (BEP) involves taking the total fixed costs and dividing the amount by the contribution margin per unit.īreak-Even Point (BEP) = Fixed Costs ÷ Contribution Margin In effect, the analysis enables setting more concrete sales goals as you have a specific number to target in mind. The incremental revenue beyond the break-even point (BEP) contributes toward the accumulation of more profits for the company.Ĭonducting a break-even analysis is a prerequisite to setting prices appropriately, establishing clear and logical sales target goals, and identifying weaknesses in the current state of the business model that could benefit from improvements (e.g., sales tactics and marketing strategies).įurthermore, 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. 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. ![]() Otherwise, the business will need to wind-down since the current business model is not sustainable.Īn unprofitable business eventually runs out of cash on hand, and its operations can no longer be sustained (e.g., compensating employees, purchasing inventory, paying office rent on time).īy 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. There is no net loss or gain at the break-even point (BEP), but the company is now operating at a profit from that point onward.įor all business owners, particularly during the earlier stages of a business, one of the most crucial questions to answer is: “When will my business break even?”īusinesses share the similar core objective of eventually becoming profitable in order to continue operating. The Break-Even Point (BEP) is the inflection point at which the revenue output of a company is equal to its total costs and starts to generate a profit. ![]()
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