This is an article from P1M3 How Profit is Created in the Pillar 1 Your Key Numbers.
How To Calculate The Break Even Point
When I set the example (link), I didn’t need to calculate lots of different numbers to find the break even point.
There is a simple formula provided you know details about the fixed costs and the contribution.
The Break Even Point equals Fixed Costs divided by the Contribution Per Unit
In the example fixed costs of £2,000 can be divided by the £40 contribution per unit.
I knew the break even point was 50 units sold and could calculate the numbers to use on either side to show the loss or profit I wanted.
If you are just starting the business or you are losing money, it’s important to calculate the level of sales you need to move you to your break even point.
The first aim is to break even…and then to make a profit.
A Few More Examples
Example 1 – Keep The Numbers Simple
Fixed Costs £5,000 per month
Contribution per unit £10
Break Even Point = 5000/10 = 500 units
i.e. if the £10 contribution assumption is true, the business will lose money if it sells 400 units, break even if it sells 500 units and make a profit if it sells 600 units.
Example 2 – Making It More Complicated
Fixed Costs = £61,525 per month
Contribution per unit £137.86
Break even point = 61525/137.86 = 446.286 units
The numbers may be bigger and more complicated and you will need a calculator to check but the arithmetic is the same.
Break Even Point = Fixed Costs/Contribution Per Unit
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Need a refresher on Sales & Costs or Contribution: The Real Income