What Break Even Point Formula and How to Calculate it?

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The break even point formula is (Total Fixed costs / Contribution Margin). And to calculate this, you need the fixed costs and the contribution margin of a business. But, before we dive into an example and some insights about this, let’s first see what is the break even point.

Break even point is the level of sales at which a company covers all its costs. In other words, it’s the point where business doesn’t make any profit or loss. So, to achieve this point, we need to find out two things, i.e. total fixed cost and contribution margin.

Now that we know the break even point formula, let’s see how to calculate it with the help of an example.

Suppose there is a company called ABC Pvt. Ltd. that manufactures electric vehicles. The total fixed cost of this company is $1,000,000 per month. The contribution margin of the company is $200 per unit.

In order to calculate the break even point, we need to use the following formula:

So, we can say that the break even point for ABC Pvt. Ltd. is 5,000 units per month. This means that if the company wants to cover its costs and not make any profit or loss, it needs to sell 5,000 units per month.

Now that we know how to calculate the break even point, let’s take a look at some insights about it.

1. The break even point is a very important metric for businesses as it tells them the minimum amount of sales that they need to generate in order to cover their costs.

2. It’s also a good way to assess the risk of a new business venture as it can help you calculate the minimum amount of sales that you need to generate in order to make a profit.

3. The break even point can also be used as a benchmark to measure the performance of a business. If a business is not able to reach its break even point, it means that it is making a loss.

4. Finally, the break even point can help you decide how much to price your product or service. If you want to generate a profit, you need to make sure that your prices are above the break even point. On the other hand, if you want to cover your costs without making a profit, then your prices need to be at or below the break even point.

Thus, we can say that the break even point is a very important metric for businesses. It tells them the minimum amount of sales that they need to generate in order to cover their costs. It’s also a good way to assess the risk of a new business venture as it can help you calculate the minimum amount of sales that you need to generate in order to make a profit. At the same time, it can be used as a benchmark to measure the performance of a business and help you decide how much to price your product or service.

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