The breakeven point is the level of sales where the total revenue received by a business equals its total costs. In other words, it is the point at which the business is neither making a profit nor incurring a loss.
To calculate the breakeven point, you need to know your fixed costs and your variable costs per unit of product or service. The formula for calculating the breakeven point is as follows:
Breakeven Point = Fixed Costs ÷ (Price per Unit – Variable Costs per Unit)
For example, if your business has fixed costs of £10,000 per month, and the price per unit of your product is £50 while the variable cost per unit is £25, your breakeven point would be:
Breakeven Point = £10,000 ÷ (£50 – £25) = 400 units
This means that you would need to sell at least 400 units of your product to cover your fixed and variable costs and break even.
Another way to calculate the breakeven point is to use your gross profit margin, and to use this you only need to know the gross profit margin percentage from your latest accounts and the total fixed costs. The gross profit margin is the percentage of revenue that remains after deducting the cost of goods sold (COGS) from revenue. The formula for calculating gross profit margin is as follows:
Gross Profit Margin = ((Revenue – COGS) / Revenue) x 100
Once you have determined your gross profit margin, you can use it to calculate your breakeven point using the following formula:
Breakeven Point = Fixed Costs ÷ (Gross Profit Margin % / 100)
For example, let’s say that your business has a gross profit margin of 40% and total fixed costs of £50,000 per year. To calculate your breakeven point, you would use the following formula:
Breakeven Point = £50,000 ÷ (40% / 100) = £125,000
This means that you need to generate £125,000 in revenue to cover your fixed costs and break even. If your revenue falls below this amount, you will operate at a loss.
Calculating the breakeven point using gross profit margin can be helpful because it takes into account the relationship between revenue and COGS. This approach can be particularly useful if your business has a complex product mix with varying margins, as it provides a more accurate picture of your business’s profitability.
It is important to understand your breakeven point because it provides crucial information about your business’s profitability and financial viability. If your sales volume is below the breakeven point, you will be operating at a loss, and your business will not be sustainable in the long run. By knowing your breakeven point, you can determine the minimum amount of revenue you need to generate to cover your costs and stay in business. It also helps you set pricing strategies, assess the impact of changes in variable costs or fixed costs, and evaluate the profitability of different products or services.
