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# How to calculate your break-even point

Turning a profit is the goal of every business, but it doesn't happen overnight. Calculating the break-event point (BEP) is a useful tool to determine when your product will become profitable. The BEP is the point at which your total costs and total revenue are equal.

The break-even point is more than the moment when you pop a celebratory bottle of champagne. It's also a useful figure to keep in mind when managing prices, operating costs and overhead. Let's go over how to calculate a break-even point using two different methods.

## Terms in the break-even point formula

Before you calculate your BEP, you need to understand a few basic financial terms used in the formula:

• Fixed costs: costs that do not change with sales or volume, with little fluctuation (e.g., monthly rent or interest payments)
• Variable costs: expenses that fluctuate in proportion to production output or sales (e.g., materials and shipping)
• Sales price per unit: the price at which your unit or service will sell to customers for each individual product
• Variable costs per unit: variable costs for each unit, as opposed to the total variable costs
• Contribution margin: the difference between the sales price per unit and the variable cost per unit.

## Break-even point formulas

There are two common ways to calculate the break-even point based on your needs: in units or sales dollars.

### 1. Calculating the break-even point in units

This calculation tells you how many units of a single product you need to sell to break even.

Break-Even Point = Fixed Costs ÷ (Sales Price Per Unit − Variable Costs Per Unit)

For example, a cosmetic company wants to know how many lipsticks from their line they have to sell to break even. Their fixed costs, including bills, payroll and rent, total \$300,000. The current sales price for one lipstick is \$10.95 and the current variable cost to sell one lipstick is \$2.25.

Example break-even formula:

Break-Even Point = \$300,000 ÷ (\$10.95/lipstick − \$2.25/lipstick)

Break-Even Point = \$300,000 ÷ \$8.70/lipstick

Break-Even Point = 34,483 lipsticks

The cosmetic company needs to sell 34,483 lipsticks to break even.

### 2. Calculating the break-even point in sales dollars

This calculation tells you how much money you need to make from the sale of a certain product to break even.

Break-Even Point = Fixed Costs ÷ Contribution Margin

For example, the same cosmetic company wants to determine how much money they need to make from the sale of lipsticks to break even. They know their fixed costs are \$300,000, so they just need to figure out their contribution margin

Contribution Margin = (Sales Price Per Unit − Variable Costs Per Unit) ÷ Sales Price Per Unit

Contribution Margin = (\$10.95/lipstick − \$2.25/lipstick) ÷ \$10.95/lipstick

Contribution Margin = \$8.70/lipstick ÷ \$10.95/lipstick

Contribution Margin = 0.79

Example break-even formula:

Break-Even Point = Fixed costs ÷ Contribution Margin

Break-Even Point = \$300,000 ÷ 0.79

Break-Even Point = \$379,746

The cosmetic company must generate \$379,746 in lipsticks sales dollars to break even.

### When to use the break-even point formula

The break-even point isn't a static calculation. It's a tool you can use at any time during your business journey to understand when one of your business’s products will start to be profitableHere are some examples of when you might use the BEP: