How to Calculate Your Breakeven Point
Your company’s breakeven point occurs when your revenue equals your fixed costs. It can help you understand how changes to your prices and costs can affect your small business.
1. Determine your fixed costs
Your breakeven point looks at your fixed costs relative to the profit earned on each unit of product produced and sold. In general, the lower your fixed costs, the lower your breakeven point.
Fixed costs won’t change based on how much product you make or sell. They include:
- office supplies
- salaries and wages of your office staff and salespeople
- payroll taxes
- employee benefits
- advertising expenses
2. Consider your variable costs
Knowing your variable costs will help you determine how much it costs to make or sell your product. They’ll change based on how much you make or sell and include:
- materials used
- direct labor
- plant or warehouse utilities
3. Set your prices
Setting the right price for your product can greatly affect your breakeven point and how quickly you’ll start generating a profit. If you sell your products for too much, your breakeven point may be lower, but it might be more difficult to sell anything. Learn more about how to set your prices.
4. Calculate your contribution margin and contribution margin ratio
Your contribution margin measures how much revenue you have leftover after selling a product to cover your fixed costs and to generate a profit. It’s simply your unit selling price minus your variable costs per unit.
Your contribution margin ratio indicates how much profit you’ll generate from each sale. It’s your contribution margin per unit divided by your unit selling price.
If you sell your product for $25, and it costs you $15 to produce and sell, your contribution margin is $10. Your contribution margin ratio is 40%.
5. Calculate your breakeven point
After you’ve calculated your contribution margin, you’re ready to calculate your breakeven point. You can calculate your breakeven point in units or sales revenue.
Calculating it in units will help you determine how many items you need to sell before you start generating a profit.
Calculating it in sales revenue will show you how much you need to make in sales before you start generating a profit.
If your total fixed costs are $5,000, and your contribution margin is $10, your breakeven point in units would be 500. In other words, you would need to sell 500 products before generating a profit.
If your total fixed costs are $5,000, and your contribution margin ratio is 40%, your breakeven point in sales revenue would be $12,500. So, you’d start making a profit after making $12,500 in sales.