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Learning how to calculate a break-even point is very important to anyone who wants to run a successful business, or even make sure that a specific project does not incur some type of a loss. The basic definition of a break-even point is the exact position in which the costs associated with the activity are equal to the amount of revenue or income generated. In order to properly calculate a break-even point, it is important to have a firm grasp of the total expenses involved in the process and relate that to the earnings generated from the sale of any goods or services produced by the business effort.
The first step in learning how to calculate a break-even point is to identify each cost involved in the creation of a product. Typically, any business enterprise will encounter two different types of expenses or costs, known as fixed and variable. Fixed costs are constant and do not change over time, such as the monthly mortgage payment on the business location. Costs of this type do not change even when unit production increases. In contrast, variable costs may include the utilities consumed as part of the production process, with the rate of consumption changing as the unit production shifts.
Once all the expenses or costs for a specific period are identified and taken into consideration, it is possible to establish a cost for each unit produced within that time frame. This essentially involved dividing the number of units produced by the total costs. The resulting figure is the amount that each unit must be sold for in order for the business to totally recoup its expenses, or the break-even point. By setting the retail price above this point, while still at a rate that is competitive in the marketplace, the business is likely to sell enough units to offset the costs and allow the business to enjoy at least a small amount of profit.
Since a portion of the costs may vary from one manufacturing period to the next, this means that businesses must take this shift into account each time they seek to calculate a break-even point for a given accounting period. For example, shifts in the costs of raw materials or utility consumption will vary based on the number of units produced during one period in comparison with another. This means that the break-even point may be higher or lower than the previous period, depending on how increases in costs result in more units produced. If a company wishes to continue generating revenues that are above this point, choosing to calculate a break-even point for each accounting period is essential.
It is important to note that the information used to calculate a break-even point must be as accurate as possible. In some cases, businesses may round off certain expenses, or use averages in order to arrive at a viable answer to the calculation. While this is acceptable, care should be taken when rounding off figures. Failure to do so may lead to the identification of a point that does not truly represent a perfect balance between cost and revenue, and may in fact provide false data that causes the business to underestimate expenses and operate at a small loss.
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