Revenue and costs - EduqasWhat is break-even and how to calculate it

Break-even is the point at which revenue and total costs are the same, meaning the business is making neither a profit nor a loss. The break-even level of output informs a business of how many products it needs to sell to reach the break-even point (BEP). Using break-even allows a business to understand its costs, revenue and potential profit to help inform business decisions.

Break-even can be calculated using the contribution method. This involves working out the contribution that each product sold provides towards the fixed costs of a business. Firstly, a business must work out the contribution, this is calculated as:

Contribution per unit = Selling price per unit – Variable costs per unit

Once the contribution per unit is found, the break-even output can be calculated:

Break-even output = Fixed costs ÷ Contribution per unit

You may also see this calculation written as:

Break-even output = Fixed costs ÷ (Selling price per unit− Variable costs per unit)

The result of this calculation is always how many products a business needs to sell in order to break even. The calculation in brackets, which gives the contribution per unit, must be completed first.

Example

A business that sells T-shirts wants to find out what its BEP is.

Its fixed costs are £400.

The selling price (per unit) is £10.

The variable costs (per unit) are £6.

Therefore:

Break-even = £400 ÷ (£10 − £6)

= £400 ÷ £4

= 100

So this business breaks even when it sells 100 T-shirts.

Sometimes the result is a little more complex, as the BEP may not be a whole number (eg 100.12). In such cases, the business would always need to sell an additional item in order to break even. An example of this is shown below:

Break-even = £401 ÷ (£10 − £6)

= £401 ÷ £4

= 100.25 T-shirts

In this case, the business would need to sell 101 T-shirts to break even.