Breakeven point definition
The breakeven point is the volume of sales required for the company to reach profitability.
The breakeven point can be expressed in volume, in value, or in days of revenues.
Breakeven point formula
There are 3 factors in the breakeven calculation:
- the sale price
- the level of variable costs
- the level of fixed costs
The breakeven point is reached when the margin on variable costs generated by the company equals the total amount of its fixed costs.
We have the following relationships:
Unitary margin on variable costs = Sale price - Unitary variable costs
Breakeven point in volume = Total fixed costs / Unitary margin on variable costs
Breakeven point in value = Breakeven point in volume x Sale price
Breakeven point in days of sales = Breakeven point in value / (Forecasted revenues / 365)
Example of breakeven analysis
Let's take the example of a shop. The shop sells its products at an average of £100/unit, has a rent of £660/month for sole fixed cost, and buys the products its sells at £40/unit.
Unitary margin on variable costs = 100 (sale price) - 40 (unitary variable costs) = £60
Breakeven point in volume = 660 (total fixed costs = rent) / 60 (unitary margin on variable costs) = 11 sales a month
Breakeven point in value = 11 (nb. of sales to break even) x 100 (sale price) = £1,100
Graphical representation of the breakeven point
The breakeven analysis can also be represented on a chart. The image below show the breakeven computation of the previous example on an annual basis:
As you can see, the company will break even after 132 sales, i.e. when the total margin on variable costs equals the annual amount of the rent of £660/month x 12 months = £7,920.