Understanding break even point (BEP): Definition, formula, and examples
9 min read
October 31, 2024 • Block Advisors
Have you ever wondered how small businesses stay afloat, let alone turn a profit? A critical topic that explores this concept is called “break even point,” or “BEP.” Never heard of this? Don’t worry – understanding this financial term is not as complex as it sounds! Follow along as we break down the specifics, with definitions and clarity on how to calculate break even point.
What is break even point?

Imagine you want to start a baking business. You’ve got all the bakeware, supplies, ingredients, an industrial kitchen lease, and even hired some help. Now, the big question: How many cakes do you need to sell to cover these initial expenses and start making a profit?
This is where the break even point comes into play. It’s the seemingly magical point that lets you, as a small business owner, know when you have reached profitability. More specifically, it finds the exact moment a business’s revenue equals its total costs. When you look at how many sales of a product or service will take to hit the break even point, any additional revenue after that point is generally profit. Knowing your break even point can also help you understand the impact of investments you may make for your company. Understanding when an expense is worth it may help with pricing strategies, allocating resources, and setting goals.
How to find the break even point
Your company will reach the break even point when the cost of running your business equals the sum of business revenue generated over a specific time period. In other words, it’s the point at which your business is neither making money nor losing it. Keep reading for an example if you’re wondering the purpose of this metric and exactly how to calculate break even point.
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What is the purpose of a break even analysis?
Doing a break even point analysis helps you learn about your business’s financial performance and ensures you’re financially secure. Think of the analysis as a compass guiding your business’ trajectory.
More specifically, it can help:
1. Set business goals: Knowing the break even point gives you a tangible, concrete goal to work towards. For example, if your goal is to achieve profitability by year three, you can weigh that goal against the break even point given your current expenses and revenues. This clarity can help set the tone for your business plan and strategy, motivating you to increase sales, change pricing strategy, cut costs, or take other actions to reach your goals – or even develop a different timeline for goal realization.
2. Set pricing: A break even analysis is a secret weapon in pricing products or services. It helps you understand the minimum price to charge to avoid losses. For example, if it costs you $10 to bake a cake and you need to sell 15 cakes daily to break even, charging less than $10 is not a good move. Conversely, once you understand and exceed the BEP, you can experiment with pricing. Charging more can increase your profit margin – leaving more profit to invest back into growing your business. Keep in mind, though, that increasing prices may also reduce demand. It’s all a balancing act.
3. Allocate resources: When you know your break even point, you can determine how much money to invest in marketing, production, and expansion while not overspending.
4. Reveal all expenses: Uncover expenses you might not have seen coming in your budget. Conducting a break even analysis can help you account for both recurring and one-time expenses to minimize surprises down the line. A good break even analysis will consider the impact of variable and fixed expenses on your bottom line.
5. Limits subjectivity: A break even analysis can objectively help you make business decisions by focusing on the facts and hard numbers of your business. It can reduce the sway of emotions on key business decision.
6. Secure funding: It’s often used as a proof point when attempting secure financing. Your break even analysis shows potential investors your business’s viability for investment and gives them confidence that you understand every aspect of your business expenses and revenue-producing activities.
How to calculate break even point
Before we show you the break even point formulas, let’s cover some complementary terms to help you better understand the formula. Understanding fixed costs, variable costs, and contribution margin will streamline learning about break even point.
What is fixed cost? These expenses stay the same no matter what. Rent, insurance, and salaries for permanent staff are examples of fixed costs.
What is variable cost? These expenses vary depending on the quantity of products or services sold. Materials, subcontracted or hired labor (if you pay per cake made), and packaging costs fall into this category.
What is contribution margin? Contribution margin is the amount of money remaining after subtracting variable costs from your total revenue. This margin usually covers the company’s fixed costs. If your business is service-based, you will likely have a lower contribution margin. If your business has higher fixed expenses (oftentimes seen with product-based companies), you may have a higher contribution margin.
The profit of a single product or service. It’s calculated with the following formula:
Contribution Margin = (Revenue – Variable Costs)
Contribution Margin Ratio = (Revenue – Variable Costs) / Revenue
Now that we’ve covered these definitions let’s use one of two formulas.
- The break even point formula in sales dollars: Break Even Point ($) = Fixed costs / Contribution margin
- The break even point formula in number of units: Break Even Point (units) = Fixed costs/ (Sales price per unit – Total variable costs per unit)
Both formulas above determines the break even point. But one will give you the BEP in dollars and the other in units.
1. Calculating break even point in sales dollars
If you’re wondering how to find the break even point in sales dollars, here is the formula again as a reminder:
Break-even point ($) = Fixed costs ÷ Contribution margin ratio
Let’s look at an example: Callie’s Cakes is a cupcake company based in the Chicago area. She is considering introducing a new product called “Cake Poppers.” She wants to know how this potential new line will impact the company’s profitability. Her small business bookkeeper walks her through the break even point calculation. Her findings help her determine whether this new product is worth launching.
First, we’ll outline the fixed cost, variable cost, and sales price for the defined time period in consideration. For the first month the product will be in production, Callie’s Cakes “Cake Poppers” costs are estimated to be as follows:
- Total monthly fixed costs = $4,000
- Variable costs = $0.80 per cake pop
- Sales price = $3 per cake pop
Next, we’ll calculate the Contribution Margin Ratio:
- Contribution Margin Ratio= ($3-$0.80)/$3 = 0.73
Finally we’ll use the break even point sales dollars formula:
- Break even point = $4,000 / .73
So, Callie’s break even point (in dollars) for her new Cake Poppers product is $5,454.54. That is, to break even during the month in question, she will need to bring in at least $5,479.45 of revenue from her new Cake Poppers line to avoid losing money. Money beyond this amount is profit that she can reinvest into her business.
2. Calculating the BEP in units
The BEP formula by number of units is:
- Break-even point (units) = Fixed costs / (Sales price per unit – Total variable costs per unit)
We can use the same fixed and variable cost assumptions from the first calculation example. To calculate the number of units needed to sell to break even, swap out the sales price with the sales price per unit in your calculation.
Here’s an example showing how to calculate break even point in units:
- Callie’s fixed costs amount to $4,000.00 per month.
- The variable cost is $0.80 per Cake Popper.
- Each Cake Popper will sell for $3.
Break even point (units) = $4,000 / ($3 – $0.8) = 1,818.18 Cake Poppers
Using this version of the break even calculation reveals that Callie must sell 1,818.18 Cake Poppers that month to break even. She’ll start bringing in a profit at Cake Popper #1819. As a small business owner, Callie has a key business decision to make in the future. If she is confident that her baking facility can produce that many Cake Poppers AND demand from customers is strong enough to support that production level, she may choose to move forward with the new line. However, if she’s not confident in her company’s ability to create and sell the new product at that scale, it may be best to wait.
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Ways to lower break even point
When reviewing your BEP, your hope is likely not just to break even, but to achieve profitability. To this end, here are a few ways to lower your BEP (reach break even point faster) and potentially increase your profit margins.
1. Reduce overhead & fixed costs: Cut unnecessary expenses that don’t directly contribute to your core business functions. See where you can run lean and maximize efficiency. Increase the contribution margin by reducing fixed costs. Examples of fixed costs and overhead include rent, utilities, insurance, employee salaries, and sub-contractor fees.
2. Revisit variable costs: Negotiate better deals with suppliers to lower material and supply costs. You can also take inventory to ensure you’re not overstocking specific items.
3. Raise prices: If you can’t reach your profitability goals or reach your desired BEP based on your current price for your business’ products or services, you may want to increase the unit price of your goods. When done, each unit’s contribution price will rise, a key component in the break even calculation. Keep in mind that while raising prices has the potential to increase your cash flow, it can also decrease customer demand. Choose a realistic price at which you can confidently expect to move your product.
Understand your small business profitability
No matter your business venture, understanding and harnessing the power of the break-even point is a key tool you can use to reach profitability and make important business decisions. When you understand this formula, you have one more way to measure your business progress.
If you want additional help calculating your company’s break even point, Block Advisors can help lighten your load. We offer tax, bookkeeping, and payroll services to help you get back to what you love.
This article is for informational purposes only. The content may not constitute the most up-to-date information and should not be construed as legal advice.