- Writing a Business Plan
- Financial Statements
- Business Forecasting
- Business Checklist
THE BREAK-EVEN POINT FORMULA:
The formula used to determine the number of units a business must sell in order to achieve a net income of zero (break-even) is as follows:
|BREAK EVEN IN UNITS =|
Lets assume for a moment, The Cigar Company sells only Cuban Cigars. Each box of cigars cost the company $20 dollars to buy (including shipping charges). In addition, the company sells each box of cigars for $50 dollars. Also, the company's annual fixed costs on average total $90,000 dollars.
Using the above information, how many units or boxes of cigars must The Cigar Company sell in order to break-even (I.E. to achieve a net income of ZERO)? To determine this, we must use the following break-even formula.
THE CIGAR COMPANY
BREAK-EVEN POINT (in boxes of cigars)
Selling Price (per box) - Variable Cost (per box)
$50 - $20
= 3,000 units or boxes of cigars
Therefore, the company would have to sell 3000 boxes of cigars during the year to break-even. The formula is that simple. As you can see from the above example, three numbers are needed in calculating the break-even point in units.
For additional information on Break even, please refer to the section entitled Break-Even Analysis.