Calculating Break-Even

Break-Even Point … the point at which a business makes enough money to pay its costs and begins to make a profit Units Dollars Total Costs Sales Revenues Break – Even Point

Components of Break-Even ► Cost  Fixed  Variable  Semivariable ► Sales revenue ► Profit and loss

Purposes of Calculating Break-Even Point ► To determine at what point the business can expect to begin making a profit ► To set prices ► To relocate the business ► To determine capital needs ► To offer incentives

Break-Even Formula BP = FC / VCM BP = Break – even point FC = Fixed costs VCM = Variable – cost margin (VCM = Selling price per unit – variable costs per unit)

Calculating Break-Even ► In Units  Determines how many products a business must sell in order to break even ► In Dollars  Indicates total dollar sales needed to break even

Steps in Calculating Break-Even 1. Identify costs and revenues 2. Classify costs as fixed or variable 3. Total the costs in each classification 4. Calculate the variable cost per unit 5. Subtract the variable cost per unit from the selling price per unit to obtain variable cost margin, VCM 6. Divide the total fixed cost, FC, by the VCM to determine break-even point, BP, in units 7. Multiply BP in units by the price per unit to determine total sales needed to break even