What is a Breakeven Analysis?
In its simplest form, the breakeven point tells you how many units of goods you need to sell to cover all of your fixed and variable costs.
Variable costs are those that change as the number of units produced changes. These costs include such things as labor and materials.
Fixed costs, on the other hand, do not change with units produced. Examples are rent, utilities and property insurance.
Breakeven occurs when your business is neither making nor losing money.
How to Calculate Breakeven
Determine the following three things:
- 1. Your fixed costs.
- 2. The average variables costs for all items you sell. If you want to determine the breakeven for a single item type where the costs are the same, then determine the actual variable costs for that item.
- 3. Determine the average unit price for all items you sell. Again, if you are doing a breakeven analysis on a single item where the price doesn't vary, then find the actual unit price.
Simple Breakeven Formulas Cheatsheet
Total expenses = variable costs + fixed costs
Total expenses = (units x variable cost per unit) + fixed costs
Since the variable costs are often not the same for every unit, you can think of the variables costs as an average for the breakeven analysis. At breakeven
Price x units = (units x variable cost per unit) + fixed costs
Determining the number of units that needs to be sold to arrive at breakeven gives you
Breakeven units = fixed costs/(price – variable cost per unit)
Example: Your monthly fixed costs are $6000. The average unit price for the things you sell is $4 and the average variable cost per unit is $1. That means for every item you sell, you have $3 covering your fixed costs. To breakeven, you need to sell 2000 units.
2000 units = $6000/($4-$1)
It's easy to calculate breakeven price as well as breakeven units as we did in the example above. Since we know that 2000 units is breakeven and the price per unit is $4, the breakeven price is simply
$8000 = 2000 x $4.
To calculate gross margin percent:
(Price – variable cost per unit)/price = gross margin percentage