 How to Calculate Break-Even Points in QuickBook 2014 - dummies

How to Calculate Break-Even Points in QuickBook 2014

In accounting, a break-even point shows the sales revenue volume that produces zero profit and zero loss. You can calculate your break-even points within QuickBooks.

Remember the formula for performing profit-volume-cost analysis? It goes like this:

profits = (sales revenue x gross margin percentage) – fixed costs

Rather than calculate profits based on the other three variables (sales revenue, gross margin percentage, and fixed costs), you can calculate a sales revenue amount based on the other three variables (profits, gross margin percentage, and fixed costs).

The formula for making such a break-even calculation, based on algebraic manipulation of the profit-volume-cost analysis formula, looks like this:

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

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

\$160,000 / 40 percent

which produces the result

\$266,667

Accordingly, the boat-building business needs \$266,667 of revenue to break even.

The break-even point formula described in the preceding paragraphs estimates a break-even point in revenue. However, such a revenue-based break-even point often doesn’t make complete sense. For example, in the case of the boat-building business in which you sell boats for \$100,000 each, there’s no practical way to get \$266,667 of revenue.

You can’t sell two-thirds of a boat. The correct way to interpret a break-even point in revenue in this example, then, is to interpret it as a rough break-even point. As a practical matter in the boat-building business, the break-even point is slightly less than three boats per year.

If, in this example, you were working with boats that cost \$1,000 each or \$100 each, the precision of the break-even point would be much greater.

For example, if you manufactured day-sailor boats that cost \$1,000 apiece, you would know that the break-even point is somewhere between 266 and 267 boats (calculated by dividing the \$266,667 of revenue by \$1,000). If the boats cost \$100 each — perhaps they’re model boats — you know that the break-even point is between 2,666 model boats and 2,667 model boats (calculated by dividing the revenue amount by \$100).

In either case, you see that the smaller the revenue per unit, the more precision you get in the break-even point in units.

You can also see from this example that the process of converting a break-even point in revenue to a break-even point in units is simply a matter of dividing the break-even point in revenue by the unit price.