Break Even Analysis

The break even point in business is the point at which revenue is equal to expenses.  So it is the point where a business owner is not losing any money when considering all the variables.  In simplistic terms the amount which exceeds this break even point would be known as profit and anything short of the break even point would be the loss.  Lets start with a simple example to help explain the concept of break even analysis.

Lets say I have a business making hats and each hat is sold for \$20.  The cost of producing each hat (the variable cost) is \$5 and the business has \$250 in fixed costs each month to produce the hats.

I will start with the formula for the calculation of the break even point.

Break Even Point (units)=Fixed Costs ÷ (Selling Price - Variable Costs)

BEP=\$250 ÷ (\$20 - \$5)

BEP=16.66 hats

As we can not sell a portion of a hat we can safely say we will need 17 hats to break even.  There will be a slight profit but this is valuable information to know for the business.  Greater than 17 hats sold is equal to profit while any less than 17 will mean a loss.

To turn the above equation into a dollar figure I will simply multiply the amount of hats we need to sell by our BEP.

BEP (in \$)=BEP * Cost Per Sale

BEP (in \$)=17 * \$20

BEP (in \$)=\$340

So now we know we need to earn \$340 per month in order to break even.  But what if we have a certain amount in mind in order to create the lifestyles of the rich and famous.  Lets say I want to earn the princely sum of \$500 profit each month.  The following is the equation for this.

Break Even Point (units)=(Fixed Costs + Profit Required) ÷ (Selling Price - Variable Costs)

BEP=(\$250 + \$500) ÷ (\$20 - \$5)

BEP=50 hats

So I will need to sell 50 hats a month to live the life afforded by a \$500 profit a month.  The above analysis is simplistic in that it ignores taxation.  Perhaps it is an ebay business?