Break Even Point: What It Means And How To Calculate It
Hanna Kielar4-Minute Read
February 01, 2022
The breakeven point is a term that can be used in many different financial situations. Whether you’re looking for personal budgeting tips, investing in the stock market or setting goals for your business plan, it’s important to know what it means to “break even.”
Breakeven Point Defined
A breakeven point (BEP) is the point at which total revenues and costs are equal, resulting in no difference between profit and loss. The breakeven point analysis measures the margin of safety, a term commonly used in investing and budgeting for revenues and expenses. Breaking even is for the most part a good thing because it means that you have as much money coming in as you have going out. This analysis is particularly helpful for analyzing costs and planning for the future.
Breakeven Point Formula
You can calculate your breakeven point in units or dollars with the following formulas:
- Breakeven Point In Units = Fixed Costs ÷ Contribution Margin
- Contribution Margin = Sales Price Per Unit − Variable Costs Per Unit
- Breakeven Point In Dollars = Fixed Costs ÷ Contribution Margin Ratio
- Contribution Margin Ratio = (Revenue - Variable Costs) ÷ Revenue
The only difference between the two formulas above is how the contribution margin is reflected in the formula.
Let’s break those formulas down even further. Fixed costs are costs that are not affected by the level of sales volume and will remain the same. However, variable costs will change. Variable costs are often associated with labor or material costs used in production. The sales price per unit is how much consumers are charged for the product. The contribution margin ratio is the difference between the sale price minus the variable cost and then divided by the sale price per unit.
Let’s take a look at how to use a breakeven point formula in different situations.
How To Calculate Your Breakeven Point In Business
When you start a business, creating a business plan is one of your first moves. When a business has reached its breakeven point, this means the company is operating at neither a net loss nor a net gain. It’s beneficial to perform a breakeven analysis and examine the margin of safety for your business, to limit future financial restraints and set realistic sales volume goals.
Breakeven Point (In Units) = Total Fixed Costs ÷ Contribution Margin
For example, you have a lemonade stand and want to know how much lemonade you need to sell to break even. Your accounting costs are as follows:
Fixed costs = $200 (total for monthly supplies like water, sugar, lemons, cups, etc.)
Variable costs = $.25 (per pitcher of lemonade)
Sales price = $1.50 (a cup)
160 = 200 ÷ (1.50 − 0.25) or 160 = 200 ÷ 1.25
In this case, you would need to sell 160 cups of lemonade in 1 month to reach the breakeven point.
To calculate the breakeven point in dollars:
Breakeven Point (In Dollars) = Fixed Costs ÷ Contribution Margin
240 = 160 × 1.50
To break even in dollars, you would need to sell $240 worth of lemonade. Cheers to a hot summer and drinking lots of lemonade.
How To Calculate Your Breakeven Point On A Mortgage
As a homeowner, you may come to a point where you’re looking to have extra cash and may seek to refinance your mortgage loan. You can determine the value of a refinance on your mortgage loan by calculating the refinance breakeven point. To determine your total refinancing costs, total up your closing costs and fees. Then to determine how many months it will take to break even on your mortgage, divide the total loan costs by your monthly savings.
When you break even on a mortgage, you begin to save money and recoup finance costs.
Breakeven Point = Total Fixed Costs ÷ Monthly Savings (aka Contribution Margin)
Fixed costs = $2,000 (refinancing fees and closing costs)
Variable costs = $100 (monthly savings)
20 = 2,000 ÷ 100
That means in 20 months, you will recoup the cost of refinancing your mortgage and you will break even.
How To Calculate Your Breakeven Point In The Stock Market
The stock market isn’t as intimidating as it sounds. You can use the breakeven point analysis to figure out when you’ll make back the money you used to buy stocks.
For example, as an investor, you buy a stock share for $100. If the selling price falls to $75, you will lose money versus if the stock sale price rises above $100 to $125, you will make a profit of $25 per share. If the stock price stays at $100, you are at the breakeven point and have not lost or gained any more money.
When stock options trading becomes involved, things become a little more complicated and the breakeven analysis becomes more complex.
The Bottom Line: Breakven Analysis Rule Of Thumb
Determining your breakeven point is a safe route but it’s not the end-all. Every financial situation is different and it’s important to seek out all options to strategize profitability in your business, stock holdings or in your house. If you’re looking for more ways to have more money in your pockets, learn about working with a financial advisor and see if this is the right move for you.
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