What is Break-Even Analysis?

Break-even Point Analysis

Before your business can realize “profit,” you must first understand the concept of breaking even. To break even on your company’s product lines and/or services, you must be able to calculate the sales volume needed to cover your costs and how to use this information to your advantage. You must also be familiar with how your costs react to changes in volume. Break-even analysis (cost-volume-profit analysis or CVP) allows you to answer many planning questions and help with decision-making.

Break-even analysis is the process of calculating the sales needed to cover your costs so that there is zero profit or loss. The break-even point that is arrived at by such analysis is important to the profit planning process. Such knowledge allows managers to maintain and improve operating results. It is also important when introducing a new product or service, modernizing facilities, starting a new business, or appraising production and administrative activities.

Break-even analysis can also be used as a screening device, such as the first attempt to determine the economic feasibility of an investment proposal. Also, pricing may be aided by knowing the break-even point for a product.

The guidelines for breaking even are:

  • If there’s an increase in selling price, it lowers break-even sales
  • If there’s an increase in variable cost, it increases break-even sales
  • If there’s an increase in fixed cost, it increases break-even sales

What is Break-Even Point?

A company’s break-even point is the point at which its revenues cover all of its costs. Basically, we can define the break-even point as the level of sales (either units or dollars) that causes profits (however measured) to equal zero. Most commonly, the break-even point as the unit sales required for earnings before interest and taxes (EBIT) to be equal to zero. This point is often referred to as the operating break-even point. In conclusion, the break-even point is an important metric that indicates how many units a company must sell, or the dollar value of revenues a company must generate, to cover all of its costs (both fixed and variable).

How to Calculate the Break-Even Point in Unit or Dollar Value

A company’s break-even point in units is calculated as: (total fixed costs) / (contribution margin per unit). The breakeven points that are shown for each accounting period apply to each accounting period separately; they are not cumulative in nature. It also varies across accounting periods due to the fluctuation in fixed costs, variable costs, and revenues over each of the accounting periods. Below is an example calculation of the Breakeven Point in Units.

Break-even Point in Units
Break-even Point in Units

The calculation is as follows:

Break-even Point in Units Calculation with Formula
Break-even Point in Units Calculation

Where:
Q = Quarter;
VarCosts = Variable Costs;
VCperUnit = Variable Costs per Unit;
CMPU = Contribution Margin per Unit

Another way to calculate a company’s breakeven point is in terms of dollars of revenues. Calculating the breakeven point in dollars of revenues does not change the breakeven point; it simply offers another metric (in addition to breakeven in units) by which can be analyzed and assessed. A company’s breakeven point in dollars of revenues is equal to: (breakeven point in units) * (price per unit). The price per unit used in this case is the average selling price per unit over each accounting period. Below is an example calculation of the Breakeven Point in Dollar Value.

Break-even Point in Dollars Calculation
Break-even Point in Dollars

The calculation is as follows:

Break-even Point in Dollars Calculation with formula
Break-even Point in Dollars Calculation

Where:
Q = Quarter;
FixCosts = Fixed Costs;
VarCosts = Variable Costs;
TotCosts = Total Costs;
VCperUnit = Variable Costs per Unit;
CMPU = Contribution Margin per Unit;
BpU = Break-even Point per Unit

You can also determine the break-even point by using a graphic table such as the following:

Break-Even Point Graph presentation with Explanation
Break-Even Point Graph


Using the graphic shown above, the revenue, total cost, and fixed cost are plotted on a vertical axis and volume is plotted on a horizontal axis. The break-even point occurs at the intersection of the revenue line and the total cost line. It also depicts profit potentials over a wide range of activity. Basically, it shows how profits increase with increases in volume.

Break-Even Analysis Calculator – Break-Even Analysis Spreadsheet in Excel Template

By simply adding a break-even analysis for your project or business, you will be able to evaluate its feasibility and monitor when it becomes profitable or able to at least cover the costs expended. Basically, it is a very useful tool as a metric to calculate the level of fixed costs relative to the profit earned by your business or project. But of course, to conduct a break-even analysis, one would need to put it down in a presentable report so that you can use it in the future for potential investors. The best way to represent it is by building a financial model which includes the calculation of the break-even point.

Are you looking for a financial model that includes the calculation of when you can reach break-even? If you are, then you can simply use a break-even analysis calculator. It comes in a form of break-even analysis Excel template which you can use as a reference or a base of your own financial model. The template contains break-even analysis spreadsheets which are ready-made by financial modeling experts for any kind of user. The break-even analysis calculator is actually a part of a full working model to help determine the break-even point of a business or company.

You can download these break-even analysis spreadsheets or break-even analysis Excel templates here: Financial Models with Break-Even Analysis. There, you can also find several financial model templates for different use cases and industry-specific at eFinancialModels which consists of financial modeling experts with vast experience and substantial know-how. The templates are also available for download anytime and anywhere in the globe such as in the USA, Germany, Italy, Japan, UK, and many more who are in need of help when it comes to their financial modeling tasks.