Break Even Point Formula
A business reaches its break even point when revenue is equal to expenses and net income is zero. It is useful to be able to calculate the revenue needed for a business to break even, and to do this we use the break even formula.
The breakeven formula is:
As can be seen to use the break even revenue formula you need to obtain values for the gross margin percentage and the fixed costs.
How to Calculate Break Even Point
Firstly using your latest set of accounts or forecast you first need to calculate your gross margin percentage as follows:
- Take your current revenue figure (say 200,000).
- Total your variable costs (say 80,000). Variable costs are those that only happen if a business produces or sells a product e.g manufacturing costs.
- Subtract the variable costs from the revenue figure to give a gross margin (200,000 – 80,000) = gross margin = 120,000.
- Divide the gross margin by the revenue figure to give a gross margin percentage (120,000/200,000)= gross margin percentage = 60%.
Secondly to use the break even formula and to calculate break even you need to proceed as follows:
- Total your fixed costs (say 96,000). Fixed costs are those which happen whether you sell anything or not e.g office costs.
- Divide your fixed costs by the gross margin (96,000/60%) = break even revenue = 160,000.
As can be seen what the break even formula is saying is that at revenue of 160,000 and a gross margin percentage of 60% you make a gross margin of 96,000 (160,000 x 60%) which covers the fixed costs of 96,000 to give a net income of zero. It is important to realize that any revenue above 160,000 will result in a profit, any revenue below 160,000 will result in a loss.
Break Even Formula Download
The Excel sheet, available for download below, uses the break even formula to calculate break even point for you by inserting values for revenue, variable costs, and fixed costs.