# Break Even Analysis Template Formula to Calculate Break-Even Point

• Overall, break-even analysis is a critical tool in the financial world for businesses, stock and option traders, investors, financial analysts and even government agencies.
• College Creations, Inc (CC), builds a loft that is easily adaptable to most dorm rooms or apartments and can be assembled into a variety of configurations.
• When that happens, the break-even point also goes up because of the additional expense.
• In reality, increasing production may also increase the expenses that are listed as “fixed costs” because they increase as the business grows and hires new employees.

Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master’s in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

## Contractor Calculators

The analysis seeks to identify how much in sales will be required to cover all fixed costs so that the business can begin generating a profit. The break-even analysis is important to business owners and managers in determining how many units (or revenues) are needed to cover fixed and variable expenses of the business. The term “break-even sales” refers to the sales value at which a company earns no profit no loss. In other words, the break-even sales are the dollar amount of revenue that precisely covers the fixed expenses and the variable expenses of a business. Setting the right price is crucial to your breakeven analysis and eventually turning a profit with your startup. You can’t calculate expected revenue if you don’t know what your unit price will be.

• The fixed costs are broken down further into Start-up Costs (SC) and Recurring Fixed Costs (RC).
• That’s the difference between the number of units required to meet a profit goal and the required units that must be sold to cover the expenses.
• Hicks Manufacturing can use the information from these different scenarios to inform many of their decisions about operations, such as sales goals.
• Anything it sells after the 2,500 mark will go straight to the CM since the fixed costs are already covered.

The break-even point helps businesses with pricing decisions, sales forecasting, cost management and growth strategies. With the break-even point, businesses can figure out the minimum price they need to charge to cover their costs. When this point is measured against the market price, businesses can improve their pricing strategies. Also, by understanding the contribution margin, businesses can make informed decisions about the pricing of their products and their levels of production. Businesses can even develop cost management strategies to improve efficiencies.

## Formula to Calculate the Break-Even Point

An example is an IT service contract for a corporation where the costs will be frontloaded. When costs or activities are frontloaded, a greater proportion of the costs or activities occur in an earlier stage of the project. An IT service contract is typically employee cost intensive and requires an estimate of at least 120 days of employee costs before a payment will be received for the costs incurred. An IT service contract for \$100,000 in monthly services with a 30% profit margin will require 4 months of upfront financing of \$280,000 balanced over the four months before a single payment is received. A company has achieved breakeven when its total sales or revenues equal its total expenses.

## How to Calculate Break Even Point in Units

If the stock is trading above that price, then the benefit of the option has not exceeded its cost. If the stock is trading at \$190 per share, the call owner buys Apple at \$170 and sells the securities at the \$190 market price. Upon doing so, the number of units sold cell changes to 5,000, and our net profit is equal to zero, as shown below in the screenshot of the finished solution. In effect, the analysis enables setting more concrete sales goals as you have a specific number to target in mind. Another reason why break-even analysis is important to stock and option traders is that break-even analysis provides insight into their positions’ profitability.

Let’s take a look at a few of them as well as an example of how to calculate break-even point. Break-even analysis is useful in studying the relation between the variable cost, fixed cost and revenue. Generally, a company with low fixed costs will have indentured servants a low break-even point of sale. Then, by dividing \$10k in fixed costs by the \$80 contribution margin, you’ll end up with 125 units as the break-even point, meaning that if the company sells 125 units of its product, it’ll have made \$0 in net profit.

## When is Break-even analysis used

Alternatively, the calculation for a break-even point in sales dollars happens by dividing the total fixed costs by the contribution margin ratio. The contribution margin ratio is the contribution margin per unit divided by the sale price. The basic formula for break-even analysis is derived by dividing the total fixed costs of production by the contribution per unit (price per unit less the variable costs).

Yes, you would want to use the average cost per unit along with the average selling price to get the contribution margin per unit in the formula. To calculate BEP, you also need the amount of fixed costs that needs to be covered by the break-even units sold. The break-even point component in break-even analysis is utilized by businesses in various ways.

On the other hand, if this were applied to a put option, the breakeven point would be calculated as the \$100 strike price minus the \$10 premium paid, amounting to \$90. Assume an investor pays a \$4 premium for a Meta (formerly Facebook) put option with a \$180 strike price. That allows the put buyer to sell 100 shares of Meta stock (META) at \$180 per share until the option’s expiration date.

Stock and option traders need break-even analysis to facilitate several functions. Firstly, they use break-even analysis to help them figure out at which point their stock and option positions become profitable. Also, break-even analysis help stock and option traders manage their risks. Through knowing their break-even value, stock and option traders can set stop loss levels that mitigate their losses if the trade moves against them.

At the end of the day, your business needs to know what costs are impacting its ability to generate revenue. A break-even analysis can help you understand whether some products may be costing you more money than their worth. For example, products with low contribution margins or ratios might be too expensive to keep in production. What happens when Hicks has a busy month and sells 300 Blue Jay birdbaths? We have already established that the contribution margin from 225 units will put them at break-even. When sales exceed the break-even point the unit contribution margin from the additional units will go toward profit.

If it subsequently sells units, the loss would be reduced by \$150 (the contribution margin) for each unit sold. This relationship will be continued until we reach the break-even point, where total revenue equals total costs. Once we reach the break-even point for each unit sold the company will realize an increase in profits of \$150. Calculating the break-even analysis is useful in determining the level of production or a targeted desired sales mix. The study is for a company’s management use only, as the metrics and calculations are not used by external parties, such as investors, regulators, or financial institutions. This type of analysis involves a calculation of the break-even point (BEP).