Calculating your break-even point and unit

To determine your break-even point, you need

to know what your fixed costs and variable

costs are. Then you can simply plug these num-

bers into a formula. I start off by explaining both

of these costs:

 ✓ Fixed costs: These costs make up your

overhead. They’re expenses that don’t vary

according to production rates. Examples

of fixed costs are rent, office equipment,

insurance, and utilities.

 ✓ Variable costs: These are the expenses

that do vary with the amount of service

provided or goods produced. Your variable

costs include costs such as hourly pay and

raw materials. Other variable costs include

promotion and advertising expenses.

Here’s what the break-even formula looks like:

(Fixed Costs) / (1 – (Variable cost per unit /

Selling Price Per Unit)). To see how this for-

mula works, suppose you’re running a service

business. Your fixed costs total $60,000. Your

variable costs total $50 (you pay your consul-

tant $50 per hour). You sell consulting services

at $125 per hour. So your formula to determine

your break-even point looks like this:

 $60,000 / (1 – (50/125)) = $100,000

If you aren’t making $100,000, you can’t cover

your costs. If you make more than $100,000,

you’re making a profit.

After you figure out what you need when it

comes to revenue for your business to survive,

you need to determine how many units you must

produce and sell to break even. In the previous

example, your consultant makes $50 per hour.

Your company bills out $125 per hour, so how

many hours do you need to spend consulting in

order to break even?

Your formula looks like this: (Fixed Costs) / (Unit

Contribution Margin) = Number of Units Needed

to Break Even. The Unit Contribution Margin is

your selling price per unit minus your variable

cost per unit. So here’s how it looks when you

plug in the numbers:

 $60,000 / (125 – 50) = 800 units (hours per

year)