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How to Calculate The BreakEven Point with graph
What is the Break Even Point
Before we start to discuss how to calcuate the break even point lets first figure out what exactly it is!
The break even point (BEP) is defined as “the point at which costs/expenses and revenue are equal; your company is not making a net loss or net gain”. This is the point that you know you need to cross just to cover the expenses of running your business day to day. If you can get beyond this point than that means you are now making a profit. It is used so that companies know how many pieces of a product or service they need to sell to make sure they are not losing money.
Let use it in an example:
If a business sells 200 DVD’s every month they make a loss, if they sell more it will be a profit. Knowing this the management of the company can work out whether or not they will be able to make and sell 200 DVD’s every month.
How To Calcuate the Breakeven Point
In Simple Terms The Breakeven point can be calculated by using the formula:
Total Revenue = Total Cost
When your total revenue or sales is equal to your total cost that is when you break even.
Total revenue is pretty easy to calculate. It is essentialy your total sales.
Total costs on the other hand take into account 2 different set of costs.
They are fixed costs and variable costs.
Fixed costs is defined as those costs which stay the same whether 0 units are produced or 1,000,000 units are produced. Things like rent/insurance/taxes are good examples of fixed costs, they stay the same whether you do business or now.
Variable costs are defined as those costs which increase as production/output is increased. Example of variable costs are wages/raw materials. To produce one widget it costs $2, to product 10 it costs $20.
To calculate your total costs you need to add your variable and fixed costs together.