What happens to break-even point when the sales price per unit increases?

A contribution margin allows you to determine the profit you generate from each individual product your business sells. The break-even point is the amount of revenue your business must generate to cover its costs and expenses. At the break-even point, your business has no profits or losses.

Contribution Margin

1. To calculate the contribution margin for each of the products your business sells, you subtract the variable costs related to the specific product from the revenue it generates. Revenue is your gross income and variable costs are directly related to the product and are subject to change. For example, your heating and cooling bills are variable costs while your rent is a fixed cost. Calculating the contribution margin allows you to see how much revenue each product earns.

Break-Even Point

1. The break-even point tells you how much money your business needs to make before it starts earning actual profits. For instance, if your expenses are $1,000 per month and your revenue is $1,000 per month, then you are at your break-even point. This is where your business is making enough money to cover your expenses, but it isn’t making a profit. To help you increase your profits, you want to increase your contribution margin and decrease your break-even point.

Contribution Margin Increase

1. Increasing the contribution margin of your products means you need to increase the amount of profit each product generates. To do this, you decrease the variable costs associated with each product. The equation for contribution margin is the product’s revenue minus its variable costs, divided by the product’s revenue. If you have a product that earns $50 in revenue, has variable costs of $30, its contribution margin is $50 - $30 / $50 = 0.40 (40 percent). If you reduce the variable costs of the product, you increase the product’s contribution margin. For example, you reduce the costs of raw materials, which reduce your variable costs by $10. Now, the contribution margin for that product is $50 - $20 / $50 = 0.60 (60 percent).

Break-Even Decrease

1. When you increase the contribution margin of the products you sell, you are decreasing the costs and expenses associated with each product and increasing the amount of revenue each product generates. The result of is a decrease in your break-even point. This means your business must generate less revenue to break even after you increase the contribution margin for your products than prior to the contribution margin increase.

5 Min. Read

July 21, 2022

To calculate the break-even point in units use the formula: Break-Even point (units) = Fixed Costs ÷ (Sales price per unit – Variable costs per unit) or in sales dollars using the formula: Break-Even point (sales dollars) = Fixed Costs ÷ Contribution Margin.

Here’s What We’ll Cover:

What Is the Break-Even Point?

What Is the Formula for the Break Even Point?

Break-Even Point Examples

NOTE: FreshBooks Support team members are not certified income tax or accounting professionals and cannot provide advice in these areas, outside of supporting questions about FreshBooks. If you need income tax advice please contact an accountant in your area.

What Is the Break-Even Point?

The break-even point is the point where a company’s revenues equals its costs. The calculation for the break-even point can be done one of two ways; one is to determine the amount of units that need to be sold, or the second is the amount of sales, in dollars, that need to happen.

The break-even point allows a company to know when it, or one of its products, will start to be profitable. If a business’s revenue is below the break-even point, then the company is operating at a loss. If it’s above, then it’s operating at a profit.

How to Calculate Break Even Point in Units

FIXED COSTS ÷ (SALES PRICE PER UNIT – VARIABLE COSTS PER UNIT)

Fixed Costs - Fixed costs are ones that typically do not change, or change only slightly. Examples of fixed costs for a business are monthly utility expenses and rent.

Sales Price per Unit- This is how much a company is going to charge consumers for just one of the products that the calculation is being done for.

Variable Costs per Unit- Variable costs are costs directly tied to the production of a product, like labor hired to make that product, or materials used. Variable costs often fluctuate, and are typically a company’s largest expense.

The calculation is as follows:

Total variable costs ÷ Total units produced

Break-Even Point Examples

Let’s show a couple of examples of how to calculate the break-even point.

Sam’s Sodas is a soft drink manufacturer in the Seattle area. He is considering introducing a new soft drink, called Sam’s Silly Soda. He wants to know what kind of impact this new drink will have on the company’s finances. So, he decides to calculate the break-even point, so that he and his management team can determine whether this new product will be worth the investment.

His accounting costs are as follows, for the first month the product will be in production:

Fixed Costs = $2,000 (total, for the month)

Variable Costs = .40 (per can produced)

Sales Price = $1.50 (a can)

Calculating the Break-Even Point in Units

Fixed Costs ÷ (Sales price per unit – Variable costs per unit)$2000/($1.50 - $.40)Or $2000/1.10

=1818 units

This means Sam needs to sell just over 1800 cans of the new soda in a month, to reach the break-even point.

Calculating the Break-Even Point in Sales Dollars

Fixed Costs ÷ Contribution Margin

Fixed Costs

(See above)

Contribution Margin

Contribution Margin is the difference between the price of a product and what it costs to make that product.

The calculation is as follows:

(Sale price per unit – Variable costs per unit)/Sale price per unit

Break-Even Point Examples

Let’s show a couple of examples of how to calculate the break-even point.

Sam’s Sodas is a soft drink manufacturer in the Seattle area. He is considering introducing a new soft drink, called Sam’s Silly Soda. He wants to know what kind of impact this new drink will have on the company’s finances. So, he decides to calculate the break-even point, so that he and his management team can determine whether this new product will be worth the investment.

His accounting costs are as follows, for the first month the product will be in production:

Fixed Costs = $2,000 (total, for the month)

Variable Costs = .40 (per can produced)

Sales Price = $1.50 (a can)

Calculating The Break-Even Point in Units

Fixed Costs ÷ (Sales price per unit – Variable costs per unit)

$2000/($1.50 – $.40)

Or $2000/1.10

=1818 units

This means Sam needs to sell just over 1800 cans of the new soda in a month, to reach the break-even point.

Calculating The Break-Even Point in Sales Dollars

Fixed Costs ÷ Contribution Margin (Sales price per unit – Variable costs per unit, with resulting figure then divided by sales price per unit)

$2000/.7333=$2727

This means Sam’s team needs to sell $2727 worth of Sam’s Silly Soda in that month, to break even. Anything after that amount, will be profit for the company.

To confirm this figure: you can take the 1818 units from the first calculation, and multiply that by the $1.50 sales price, to get the $2727 amount.

More Resources on Small Business Accounting

RELATED ARTICLES

The break-even point (break-even price) for a trade or investment is determined by comparing the market price of an asset to the original cost; the break even point is reached when the two prices are equal.

In corporate accounting, the break-even point formula is determined by dividing the total fixed costs associated with production by the revenue per individual unit minus the variable costs per unit. In this case, fixed costs refer to those which do not change depending upon the number of units sold. Put differently, the break-even point is the production level at which total revenues for a product equal total expenses.

• In accounting, the break-even point is calculated by dividing the fixed costs of production by the price per unit minus the variable costs of production.
• The break-even point is the level of production at which the costs of production equal the revenues for a product.
• In investing, the break-even point is said to be achieved when the market price of an asset is the same as its original cost.

Break-even points can be applied to a wide variety of contexts. For instance, the break-even point in a property would be how much money the homeowner would need to generate from a sale to exactly offset the net purchase price, inclusive of closing costs, taxes, fees, insurance, and interest paid on the mortgage—as well as costs related to maintenance and home improvements. At that price, the homeowner would exactly break even, neither making nor losing any money.

Traders also apply BEPs to trades, figuring out what price a security must reach to exactly cover all costs associated with a trade including taxes, commissions, management fees, and so on. A company's break even is likewise calculated by taking fixed costs and dividing that figure by the gross profit margin percentage.

Assume an investor buys Microsoft stock at $110. That is now their break-even point on the trade. If the price moves above $110, the investor is making money. If the stock drops below $110, they are losing money.

If the price stays right at $110, they are at the BEP, because they are not making or losing anything.

For options trading, the break-even point is the market price that an underlying asset must reach for an option buyer to avoid a loss if they exercise the option. For a call buyer, the break-even point is reached when the underlying is equal to the strike price plus the premium paid, while the BEP for a put position is reached when the underlying is equal to the strike price minus the premium paid. The break-even point doesn't typically factor in commission costs, although these fees could be included if desired.

Assume that an investor pays a $5 premium for an Apple stock call option with a $170 strike price. That means the investor has the right to buy 100 shares of Apple at $170 per share at any time before the options expire. The break-even point for the call option is the $170 strike price plus the $5 call premium, or $175. If the stock is trading below this, the benefit of the option has not exceeded its cost.

If the stock is trading at $190 per share, the call owner buys Apple at $170 and sells the securities at the $190 market price. The profit is $190 minus the $175 break-even price, or $15 per share.

Assume an investor pays a $4 premium for a Meta (formerly Facebook) put option with a $180 strike price. That allows the put buyer to sell 100 shares of Meta stock at $180 per share until the option's expiration date. The put position's break-even price is $180 minus the $4 premium, or $176. If the stock is trading above that price, the benefit of the option has not exceeded its cost.

If the stock is trading at a market price of $170, for example, the trader has a profit of $6 (breakeven of $176 minus the current market price of $170). 

The break-even formula for a business provides a dollar figure they need to break even. This can be converted into units by calculating the contribution margin (unit sale price less variable costs). Dividing the fixed costs by the contribution margin will provide how many units are needed to break even.

Business Breakeven = Fixed Costs Gross Profit Margin \begin{aligned} &\text{Business Breakeven} = \frac { \text{Fixed Costs} }{ \text{Gross Profit Margin} } \\ \end{aligned} ​Business Breakeven=Gross Profit MarginFixed Costs​​

The information required to calculate a business's BEP can be found in its financial statements. The first pieces of information required are the fixed costs and the gross margin percentage.

Assume a company has $1 million in fixed costs and a gross margin of 37%. Its break-even point is $2.7 million ($1 million / 0.37). In this break-even point example, the company must generate $2.7 million in revenue to cover its fixed and variable costs. If it generates more sales, the company will have a profit. If it generates fewer sales, there will be a loss.

It is also possible to calculate how many units need to be sold to cover the fixed costs, which will result in the company breaking even. To do this, calculate the contribution margin, which is the sale price of the product less variable costs.

Assume a company has a $50 sale price for its product and variable costs of $10. The contribution margin is $40 ($50 - $10). Divide the fixed costs by the contribution margin to determine how many units the company has to sell: $1 million / $40 = 25,000 units. If the company sells more units than this it will show a profit. If it sells fewer, there will be a loss.

A break-even point is used in multiple areas of business and finance. In accounting terms, it refers to the production level at which total production revenue equals total production costs. In investing, the break-even point is the point at which the original cost equals the market price. Meanwhile, the break-even point in options trading occurs when the market price of an underlying asset reaches the level at which a buyer will not incur a loss.

Generally, to calculate the break-even point in business, fixed costs are divided by the gross profit margin. This produces a dollar figure that a company needs to break even. When it comes to stocks, if a trader bought a stock at $200, and nine months later it reached $200 again after falling from $250, it would have reached the break-even point. 

Consider the following example in which an investor pays a $10 premium for a stock call option, and the strike price is $100. The break-even point would equal the $10 premium plus the $100 strike price, or $110. On the other hand, if this were applied to a put option, the break-even point would be calculated as the $100 strike price minus the $10 premium paid, amounting to $90.