WHAT IS THE BREAK-EVEN POINT FOR?
- Integra Marketing
- Mar 17
- 2 min read
Knowing the break-even point helps us understand when our business neither makes a profit nor incurs a loss. In other words, it tells us the quantity of products or services we need to sell for our business to "break even," meaning the point at which sales revenue equals costs and we are merely surviving or living paycheck to paycheck without making a profit.
Therefore, knowing the break-even point helps us to have a starting point for setting sales quotas with a profit that should be at least 30%.
To calculate the break-even point, you must identify in as much detail as possible what the total fixed costs per month, the unit variable costs, and the unit price are.
Total Fixed Costs
These are the costs that do not change as production increases or decreases... for example, rent, salaries, maintenance expenses, telephone and internet... and that we will pay even when there are no sales and are commitments that we have monthly.
Unit Variable Costs
These are the costs that are part of the production of a good or service, such as raw materials, transportation expenses, supplies needed for the operation of machines, and sales premises, for example.
Unit Price
This refers to the monetary value of a final product or service for the buyer's direct use or acquisition.
Formula for calculating the break-even point:
PE = Total Fixed Costs (Monthly) / Unit Price - Unit Variable Cost.
Let's look at a simple example of how to find and analyze the break-even point:
A company that sells t-shirts sells them for US$50 each. The cost of each t-shirt is US$25, a sales commission of US$2 is paid, and fixed expenses (rent, salaries, utilities, etc.) amount to US$3,800. What is the break-even point in units sold?
Finding the equilibrium point:
PVU = 50
CVU: 25 + 2 = 27
CF = 3800
Applying the formula:
Pe = CF / (PVU – CVU)
Pe = 3800 / (50 – 27)
Pe = 165 t-shirts
With this result we see that the business, by selling 165 t-shirts, is at the break-even point... therefore, from the 166th t-shirt onwards, it starts to make a profit.
The break-even point must be linked to the business's installed capacity and market demand. For example, if the installed capacity is 300 t-shirts per month, this quantity perfectly covers the break-even point. And if the market demand is 280 t-shirts, then we can ensure profits commensurate with the business's current capacity.
One last recommendation... in the fixed costs include your salary as Manager or owner of your business to have a more realistic figure for the break-even point and so that you don't have to take a portion of your profits.
Here is a link to download a table to calculate the break-even point.
Properly apply the Break-Even Point formula and determine when your business can begin to be profitable. Then, compare the result with your business's operational capacity and market demand. This will give you clarity on the path your company needs to take to achieve success.
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