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How to Calculate the Operating Breakeven Point

Original post by Matt McGew of Demand Media

The operating breakeven point for a business is the point at which sales revenue covers all of the fixed costs and variable costs but produces no profit for the business. A fixed cost is a cost that does not change for business based on the number of units produced. Rent, insurance and interest expenses are examples of fixed costs. A variable cost, on the other hand, represents a cost that changes based on the production volume. Labor and raw materials are examples of variable costs. You can manually calculate the operating breakeven point for a business with some basic information about the business's fixed costs, variable costs and selling price per unit.

Contents

Step 1

Determine the total monthly fixed costs for the operations of a business. For example, assume the total fixed costs for the operations of a business is $10,000.

Step 2

Determine the total variable costs for the business to produce a single unit. For example, assume the total variable costs to produce a single unit is $25.

Step 3

Determine the selling price for a single unit of the business's product. For example, assume the selling price is $50.

Step 4

Subtract the variable cost for a single unit from the selling price. Continuing the same example, $50 - $25 = $25.

Step 5

Divide the fixed costs by the figure from Step 4. Continuing the same example, $10,000 / $25 = 400. This figure represents the number of units the business must sell to break even.

Step 6

Multiply the breakeven units by the selling price. Continuing the same example, 400 x $50 = $20,000. This figure represents the breakeven point for the business based on sales revenue.


                   

References

  • "Principles of Finance"; Scott Besley and Eugene Brigham; 2008
  • "Break Even Analysis"; Michael Cafferky et al; 2010

About the Author

Since 1992 Matt McGew has provided content for on and offline businesses and publications. Previous work has appeared in the "Los Angeles Times," Travelocity and "GQ Magazine." McGew specializes in search engine optimization and has a Master of Arts in journalism from New York University.


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