The break-even point (BEP) is:
the point at which the income from the sale of a product or service equals the invested costs, resulting in neither profit nor loss; the stage at which income equals expenditure (from Dictionary.cm).
A break-even calculator will calculate the number of units you need to sell to reach the BEP.
If you are a consultant billing for your services by the day or hour, the BEP calculator will tell you how many days or hours you have to bill each month for your business to reach its break-even point.
If you are a house painter, and your average price for painting a house is $7,000, a break-even analysis will calculate how many homes you must paint each month to cover your costs.
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Break-Even Point Analysis
Remember, the break-even point is the number of units you must sell so that your business has neither a profit nor a loss.
The key thing you need to define is what the unit is.
If you sell a service and want the BEP expressed in the number of hours you must bill each month to break-even, you need to enter your hourly rate. If you need the BEP expressed in the number of days, enter your daily rate.
Or perhaps you are an Uber driver who wants to know your break-even point. You can calculate your average price per trip and enter it. In that case, your BEP is the average number of trips you must make.
On the other hand, you may decide to enter your average income per day, and then your BEP will be the number of days you need to drive.
Fixed costs are those items that do not change over time. Rent is a classic example of a fixed cost. If you have a lease on a building or vehicle, you'll have to make the periodic lease payments regardless of business conditions. A business cannot eliminate a fixed cost even if business conditions change.
One business's fixed costs could be another business's variable cost. If your company has an accountant under a monthly retainer, your analysis should consider the retainer fee as a fixed cost.
But another firm may pay an accountant on an as-needed basis. For this other firm, accounting services would be a variable cost.
Variable costs are those items that change over time and are not required. Advertising is a classic example of a variable cost. The amount a business spends on advertising can increase, decrease. Or the business can even eliminate advertising from one period to the next.
Of course, as with fixed costs, one business's variable costs could be another business's fixed cost. If your company has a twelve-month contract for local newspaper advertising, you might want to consider advertising a fixed cost.
If your business sells a product, enter the cost of the components that go into making the product. Make sure to enter the component costs consistently relative to the unit selling price. Imagine you sell hotdogs, and you want to know how many hot dogs you need to sell to reach your BEP. You buy hotdog rolls in packages of a dozen, and the hotdogs in boxes of forty-eight. You should not enter the total cost of a package of rolls and a package of hotdogs. Instead, you should enter the cost of an individual roll and a single hotdog.
The BEP (Units To Break Even)
The BEP is the number of units that you must sell for a deal or business to break-even.
What is a unit?
A unit ties back to what you entered for the "selling price per unit."
If you are an Uber driver and you enter for the selling price per unit the average price per trip, then your BEP is the number of trips you must make.
If you enter your average income per day, then the BEP is the number of days you must drive to break even.
If you entered the average price per trip and entered all your expenses as expenses per week, for you, the BEP is the number of trips you must make per week.
The point being is, what the break-even point analysis means depends on how you entered the numbers.
A benefit of this calculator is you can easily save your work. Then from time-to-time, you may tweak the numbers and rerun your break-even analysis.
How to Calculate the Break-Even Point for a Service Business
Jill is an interior design consultant. She has set her hourly rate at $85. How many hours will she have to work each month to break even?
Since Jill wants to know how many hours she needs to bill a month, she will enter all expenses as monthly expenses.
- Jill has one thing to sell - her time. Since her hourly rate is $85, on the "Selling Price" tab, enter $85.00.
- "Fixed costs" are costs that do not vary from period to period. For now, Jill only has three fixed costs. Office space rent at $1,800 a month, health insurance for herself at $650 a month, and liability insurance at $1,200 a year. Therefore, on the "Fixed Costs" tab, enter for a description "office space" and $1,800, "health insurance" $650 and "liability insurance" at $100. (Annual premium of $1,200 divided by 12 months.)
Notice how the calculator automatically calculates the cumulative cost total.
- "Variable costs" are costs that change from month to month. Variable costs are typically telephone and advertising expenses. When entering variable costs, you can enter the expected average costs (per month). In Jill's case, she will enter $150 for her phone and $300 for advertising. Usually, there will be other fixed and variable costs to enter. For now, we'll keep it simple and enter only these.
- If Jill were selling a product, she would have component costs or product costs to enter. But since Jill is selling a consulting service and not a product, she can skip this step. (See below under Notes for additional details about a product based company.)
- At this point, Jill has entered all the data that she needs to calculate her break-even point. The result is that Jill has to invoice (and be paid for!) 35.3 hours a month to break-even.
TIP: Do not stress out over whether a particular cost is a fixed or variable cost. Changing the classification of a particular cost will not change the break-even point. The point of classifying cost as either fixed or variable is so you can understand where costs may be cut to adjust your BEP.
The difference between a business that sells a service versus one that manufactures or resells a product is, a manufacturer or reseller has component costs. A service business does not.