Breakeven Point: Types, Formula, Examples

As a founder, you need to be aware of your business’s financial performance to ensure its long-term success. One of the key metrics to consider is the breakeven point. In this blog post, we’ll explain what the breakeven point is, how to calculate it, and why it’s important for your business.

Table of Contents

What is Breakeven point?

The breakeven point is a term used in finance and business that refers to the point at which the revenue earned by a company equals the costs associated with producing and selling a product or providing a service. At the breakeven point, a company is not making a profit, but it is also not experiencing a loss.

In other words, the breakeven point is the level of sales that a company must achieve in order to cover its fixed and variable costs. Fixed costs are expenses that do not change regardless of the level of production or sales, such as rent or salaries. Variable costs, on the other hand, are expenses that vary with the level of production or sales, such as raw materials or labour costs.

Types of Breakeven points

There are three main types of breakeven points that businesses can calculate:

1. Unit breakeven point: This is the number of units a business needs to sell in order to cover its total costs and break even. It is calculated by dividing total fixed costs by the contribution margin per unit. The contribution margin per unit is the difference between the price of a unit and the variable costs associated with producing that unit.
2. Revenue breakeven point: This is the level of revenue a business needs to generate in order to cover its total costs and break even. It is calculated by dividing total fixed costs by the contribution margin ratio. The contribution margin ratio is the contribution margin per unit divided by the price per unit.
3. Time breakeven point: This is the amount of time it takes for a business to break even, based on its fixed costs, selling price, and variable costs per unit. It is calculated by dividing total fixed costs by the difference between the selling price per unit and the variable costs per unit and is usually expressed in months or years.

Each of these breakeven points provides a different perspective on the financial health of a business and can be used to make decisions about pricing, production, and sales volume.

How to Calculate Break-even Point?

To calculate the breakeven point for a business, you need to determine the fixed costs, variable costs, and selling prices of all the products or services that the business offers. Once you have this information, you can use one of the following formulas:

*The weighted average contribution margin per unit is the average contribution margin per unit across all the products or services offered by the business, weighted by their relative sales mix.

* The weighted average contribution margin ratio is the average contribution margin per unit divided by the average selling price per unit, weighted by their relative sales mix.

*Note that the “12” in the formula represents the number of months in a year. If you want the answer in months, you can skip this step.

Example of Break-Even Analysis

Suppose you run a business that offers two products: Product A and Product B.

Product A sells for Rs 100 and has a variable cost of Rs 60, while Product B sells for Rs 50 and has a variable cost of Rs 30. Your fixed costs are Rs 20,000 per month. In the last month, you sold 100 units of Product A and 200 units of Product B.

To calculate the unit breakeven point, you would first calculate the weighted average contribution margin per unit:

[(100 x (Rs 100 – Rs 60)) + (200 x (Rs 50 – Rs 30))] ÷ (100 + 200) = Rs 50

Then, you would divide the total fixed costs by the weighted average contribution margin per unit:

Rs 20,000 ÷ Rs 50 = 400 units

This means you would need to sell 400 units across both products per month to break even.

To calculate the revenue breakeven point, you would first calculate the weighted average contribution margin ratio:

[(100 x (Rs 100 – Rs 60)) + (200 x (Rs 50 – Rs 30))] ÷ [(100 x Rs 100) + (200 x Rs 50)] = 0.417

Then, you would divide the total fixed costs by the weighted average contribution margin ratio:

Rs 20,000 ÷ 0.417 = Rs 47,965

This means you would need to generate Rs 47,965 in revenue across both products per month to break even.

To calculate the time breakeven point, you would first calculate the weighted average selling price per unit and the weighted average variable cost per unit:

[(100 x Rs 100) + (200 x Rs 50)] ÷ (100 + 200) = Rs 66.67 (weighted average selling price per unit)

[(100 x Rs 60) + (200 x Rs 30)] ÷ (100 + 200) = Rs 40 (weighted average variable cost per unit)

Then, you would use the following formula to calculate the time breakeven point:

Rs 20,000 ÷ (Rs 66.67 – Rs 40) ÷ 12 = 4.17 years

This means it would take you 4.17 years to break even, assuming your sales and costs remain constant.

Benefits of Breakeven Analysis

There are several benefits of conducting a breakeven analysis for a business:

1. Helps in determining pricing strategy: A break-even analysis can help businesses determine the minimum price they need to charge for their products or services in order to cover all their costs and make a profit. This information can be used to set pricing strategies that are both competitive and profitable.
2. Provides insights into cost structure: By analyzing the fixed and variable costs of the business, a break-even analysis can provide valuable insights into the cost structure of the business. This can help businesses identify areas where they can reduce costs or increase efficiency.
3. Helps in decision-making: A break-even analysis can be used to evaluate the financial impact of different business decisions, such as introducing new products, expanding into new markets, or investing in new equipment. This information can help businesses make more informed decisions and minimize financial risk.
4. Improves budgeting and forecasting: A break-even analysis can help businesses develop more accurate budgets and forecasts by providing a clear picture of their revenue and cost structure. This can help businesses plan for future growth and avoid financial surprises.
5. Provides a benchmark for performance: By regularly conducting a break-even analysis, businesses can track their financial performance over time and compare it to industry benchmarks. This can help businesses identify areas where they need to improve and make strategic adjustments to improve their profitability.

Calculating the breakeven point for your business is an essential part of financial planning. It helps you understand your costs, revenue, and profitability and make informed business decisions. By using the formula and types of breakeven points mentioned above, you can determine the minimum amount of sales or revenue needed to cover your costs and achieve profitability.

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