How to Calculate the Break-Even Point


One of the most popular analysis used by business owners and aspiring entrepreneurs is known as the Break-even Analysis. A Break Even Analysis, in its simplest form, is a tool used to determine the level of sales a business must earn in order to achieve neither a profit nor a loss. In other words, the Break-even Analysis determines the number of units or products a company must sell in order to achieve a Net Income of ZERO (revenues - expenses = $0.00). The Break-even Analysis, however, can be used to answer many other important business questions such as:

1.   What sales level is required to earn a desired Net Income?

2.   What net income would be earned if selling prices were reduced?

3.   What would the effect on net income be if costs were reduced?

4.   What effect would machines replacing workers have on net income?

5.   What would the effect on net income be if the sales mix changed?

6.   What would the effect on net income be if selling prices increased?

And so on.

As you can see from the above list, the break-even analysis focuses mainly on the items included in a company's Income Statement (revenues and expenses). Therefore, it is recommended that you fully understand the purpose and fundamental principals of the Income Statement before preceding. Discussion on the income statement can be found under the financial section entitled "The Income Statement".

Our Break-even analysis discussion provides information on the following items:

1.   The Break-even Point Formula

2.   The Components of the Break-even Point Formula

3.   Understanding the Break-even Formula

4.   A Break-even Point example for Businesses Selling a Single Product

5.   Break-even Point Example for Businesses Selling Multiple Products

6.   A Break-even Point Using a Questions & Answers Approach


Additional Examples of the Break-even Point:

J&B Incorporated
Scholarship Information Services


Categories: Financial