How to Calculate Break Even Point Formula
Running a business can be difficult, especially when it comes to figuring out how to turn a profit. One of the most important calculations you can make as a business owner is your break even point. This is the point at which your revenue equals your expenses, and you start making a profit. In this article, we’ll show you how to calculate the break even point formula for your business.
Determine Your Fixed Costs
The first step in calculating your break even point is determining your fixed costs. Fixed costs are expenses that do not change based on production or sales volume. These costs include rent, salaries, insurance, and other overhead expenses. To calculate your fixed costs, add up all of these expenses for a given period of time, such as a month or year.
Calculate Your Variable Costs per Unit
The next step is to calculate your variable costs per unit. Variable costs are expenses that vary with production or sales volume, such as materials, labor, and shipping costs. To calculate your variable costs per unit, divide your total variable costs by the number of units produced or sold during the same period of time as your fixed costs.
Determine Your Selling Price per Unit
Your selling price per unit is the amount of money you charge for each product or service. It should take into account your fixed and variable costs, as well as your desired profit margin. To determine your selling price per unit, add your fixed and variable costs per unit, and then add your desired profit margin.
Calculate Your Contribution Margin per Unit
Your contribution margin per unit is the amount of money you have left over after subtracting your variable costs per unit from your selling price per unit. It represents the amount of money you have to cover your fixed costs and generate a profit. To calculate your contribution margin per unit, subtract your variable costs per unit from your selling price per unit.
Determine Your Break Even Point in Units
Your break even point in units is the number of units you need to sell in order to cover your fixed and variable costs and break even. To calculate your break even point in units, divide your total fixed costs by your contribution margin per unit.
Calculate Your Break Even Point in Dollars
Your break even point in dollars is the amount of revenue you need to generate in order to cover your fixed and variable costs and break even. To calculate your break even point in dollars, multiply your break even point in units by your selling price per unit.
Monitor Your Break Even Point Regularly
Your break even point can change over time as your costs, selling price, and sales volume change. It is important to monitor your break even point regularly and adjust your pricing and expenses as necessary to maintain profitability.
Calculating your break even point is a critical step in running a successful business. By understanding the formula and following these steps, you can ensure that you are making informed decisions about your pricing and expenses, and staying on track to profitability.
