Calculating a break-even point in business determines the point during a specific period of time at which a company shows neither profit nor loss. The formula used to calculate a BEP in Units is (BEP) in Units = TFC / (SPU - VCU), or the total fixed costs (TFC) divided by the difference between the sales price per unit (SPU) and the variable costs per unit (VCU). The result from the latter (SPU - VCU) is called the contribution margin per unit. Total fixed costs (TFC) refers to all business costs, such as rent, equipment leases, office salaries, property taxes, loan payments and insurance that do not vary based upon sales. Sales price per unit (SPU) is the average price at which a unit is sold, and the variable cost per unit (VCU) is the total cost of all variables, such as raw material, direct labour and delivery costs that contribute to the making of a single unit.
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Calculate the TFC (total fixed costs) by adding together each of the company's fixed costs. For example, a small company with annual fixed costs of £4,550 in rental payments, £1,950 in equipment leases, and £19,500 in administrative salaries would have TFC of £26,000.
Calculate the contribution margin per unit by subtracting the variable cost per unit from the sales price per unit (SPU - VCU). For example, if a small company's product sells for £39 per unit with variable costs per unit of £13, the contribution margin per unit would be £26.
Plug the TFC and contribution margin figures into the formula BEP (in units) = TFC / contribution margin per unit. In this example, the small company's BEP would equal £26,000 / £26, or 1,000 units.
Determine the break-even point from the calculation. Using the previous example, the small business must sell 1,000 units break even and avoid a loss.
Tips and warnings
- If your break-even point prevents you from seeing the profit you desire, find less expensive vendors, eliminate employees or reduce their hours, consider working out of your home and/or raise the price of your goods.
- Use a break-even analysis as a tool to forecast projected sales revenue when creating a business plan for a new venture.
- Avoid risking your investment. Without a break-even point analysis, it is difficult to ensure that your business is viable.
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