How to Calculate a Business's Breakeven Point - dummies

How to Calculate a Business’s Breakeven Point

By Stephen L. Nelson

Here’s something you want to know about any business you own or operate: You want to know the sales revenue that the firm must achieve in order to break even. In other words, you want to know the sales revenue volume that produces zero profit but also zero loss.

Fortunately, neither this calculation nor the logic of the calculation is complicated. But everything makes more sense with an example.

Let’s say, for sake of illustration, that you sell $100,000 boats. Your unit sales price, in other words, equals $100,000.

Further, say that the per unit direct cost of making a boat—the total amount spent on the materials, labor and other manufacturing costs—runs $40,000.

And now a final piece of information: Assume the overhead costs you incur to operate your boat factory (rent, utilities, office salaries and so forth) run $180,000.

With these numbers, you can rather easily calculate the breakeven point for your imaginary boat-building business.

The first step you take is to calculate the gross margin percentage—something you do with this formula:

Gross margin percentage = (unit sales price – unit direct cost) @@ds unit sales price

Using the actual numbers from the simple example given earlier, you make the gross profit margin calculation using the formula

($100,000 - $40,000) / $100,000

which produces the result

.6 or 60%

After you have the gross profit margin percentage, you calculate the breakeven point using the formula

Break-even point (in sales revenue) = fixed costs @@ds gross margin percentage

To calculate the break-even point in sales revenue for the example boat-building business, you make the calculation

$180,000 @@ds 60 percent

which produces the result


Accordingly, the boat-building business needs $300,000 of revenue to break even.

You can convert a dollar break-even point into a unit break-even point by dividing the break-even revenue by the unit sales price. If you divide $300,000 by the $100,000 unit sales price (the price per boat), you get 3, which means you need to sell three boats to break even.