In this article, we’ll explore the formula for Break Even point, including what it is and how it works. Let’s get into it.

## What is the Formula for Break Even Point?

There are actually 2 main types of Break Even formulas, and we’ll cover both, starting with the more popular and most commonly used one in CVP Analysis – Break Even units.

By the way, if you’re wondering what “CVP Analysis” is, it’s Cost Volume Profit Analysis.

That’s a tad bit outside the scope of this article, but at this stage, it’ll suffice if you know that break even analysis falls under CVP Analysis.

### Formula for Break Even Point (Number of Units)

The Break Even formula (for the number of units) is equal to Fixed Costs (“FC”) divided by Contribution:

This particular Break Even point formula gives you the *number of units* that you’d need to sell in order to break even.

Here, represents the Break Even Point, reflects Fixed Costs (aka Total Fixed Cost), and just refers to Contribution; we’ll explore what it is in just a bit.

**Fixed** **Costs** or are, as the name suggests, costs that are *fixed*. These costs *do not change* with outputs. If a company’s fixed costs are, say, $1,000,000 then it’ll incur that full cost regardless of whether it produces 1 unit or 1,000,000 units.

*Examples of fixed costs* include rent, rates, depreciation, salaries, etc.

**Contribution** () is the difference between the Selling Price () and the Variable Cost () per unit. In other words, .

It’s kinda like Gross Profit in the Profit and Loss / Income Statement, but strictly speaking, it’s not the same thing.

*Example of Contribution:* suppose the Selling Price of an item is $10, and the Variable Cost for the same item is $4. The Contribution will then be

We’ll touch on the individual parts, and further down.

#### Alternative Expression for Break Even Units

The formula for Break Even point (in terms of the number of units) can also be written in a slightly different way, like this:

Here and continue to denote the Break Even Point and Fixed Costs (or Total Fixed Cost) respectively. And the new terms and reflect the Selling Price and the Variable Cost per unit.

**Selling Price** or refers to the price at which you would sell the product to your customer.

**Variable Cost **or

*typically*reflects costs directly involved in creating the product. It’s a little bit more tricky than that in reality, but this simplified explanation should do for now.

The main thing you want to take away right now is that both the Selling Price and Variable Cost are stated on a *per-unit* basis. The Fixed Costs, on the other hand, apply across all units.

There is an alternative formula for Break Even, which gives you the *total revenue needed* in order to break even. This is sometimes referred to as the “breakeven revenue”. Let’s now take a look at this alternative formula.

### Formula for Break Even Point (Revenue Required)

The Break Even formula (for revenue) is equal to Fixed Costs (“FC”) divided by Contribution Margin (or “CM”):

Here, reflects the Break Even Revenue and represents Fixed Costs.

The new term denotes Contribution Margin, which is calculated as follows…

The Contribution Margin is just the Contribution, expressed as a percentage of the Selling Price.

So really, we could write out the Break Even formula (for revenue) like this…

And this itself can be rewritten like so…

Now, since we know that is in fact the Contribution, we can rewrite this equation like so…

Okay, now that you know the formula for Break Even in is two forms – units and revenue – let’s apply these equations in examples.

## Examples of Break Even Point

**Question #1**

Rode Island Inc. is exploring the possibility of launching a new product, “Pro Master” that they expect to sell for $19.99 a piece. The accountants estimate the product’s variable costs to be equal to $5.55 per unit. They also confirmed that the company’s annual fixed costs are $350,000.

Assuming this is the only product they will sell, approximately how many units of the Pro Master will Rode Island Inc. need to sell in order to break even?

Please *round up* your answer to the nearest whole number.

Try solving this on your own before exploring the solution!

**Solution**

Rode Island Inc. will need to sell approximately 24,239 Pro Masters in order to break even.

How did we get this?

Well, we know that the formula for Break Even point (in terms of the number of units) is the following…

And we know that . In this example, the selling price is $19.99 and the variable cost per unit is $5.55. Thus, the Contribution must be equal to

We’re told that the Fixed Costs are equal to $350,000 so all we need to do now is plug in our numbers!

If we *round off* the answer to the nearest whole number, we have 24,238. But strictly speaking, Rode Island Inc would *not* break even if they sold 24,238 units. They’d still be at a loss! And since we’d rather be in profit than in loss, we *round up* to the nearest whole number, taking us to 24,239

Let’s now take a look at another example.

**Question #2**

Let’s continue working with Rode Island Inc. How much *revenue* will the company need to earn in order to break even? Here’s the information about the scenario again:

Rode Island Inc. is exploring the possibility of launching a new product, “Pro Master” that they expect to sell for $19.99 apiece. The accountants estimate the product’s variable costs to be equal to $5.55 per unit. They also confirmed that the company’s annual fixed costs are $350,000.

As before, please *round up* your answer to the nearest whole number.

Can you try solving it on your own? Go on, give it a shot!

### Solution

The Break Even revenue is approximately equal to $484,523

How did we get that?

Well, we know that the formula for Break Even point (in *revenue* *terms*) is the following…

Plugging in our numbers, we have…

Alternatively, we could use the other expression for the equation, like so…

And we can calculate the Contribution Margin as…

This will give us…

Plugging in the figures into the alternative formula for Break Even point (in revenue terms), we have…

And since as before, we’re *rounding up* and not rounding off, we have a final answer of $484,523

Nice and simple, isn’t it? 🙂

Hopefully, all of that makes sense, and you now know the formula for Break Even point inside out.

At the time of writing, we don’t have a course on Accounting explicitly, but we do have a variety of related finance and investing courses. The one that’s probably most relevant for you is our Investment Appraisal Mastery course, so do check it out.

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