When it comes to stocks, for example, 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 breakeven point. Your fixed costs (or fixed expenses) are the expenses that don’t change with your sales volume. Some common fixed costs are your rent payments, insurance payments and money spent on equipment. These costs will stay the same regardless of whether you sell one unit or a million units. Break-even analysis involves a calculation of the break-even point (BEP). The break-even point formula divides the total fixed production costs by the price per individual unit less the variable cost per unit.

Break-Even Point Formula

Break-even analysis assumes that the fixed and variable costs remain constant over time. However, costs may change due to factors such as inflation, changes in technology, and changes in market conditions. It also assumes that there is a linear relationship between costs and production. Break-even analysis ignores external factors such as competition, market demand, and changes in consumer preferences. Break-even analysis compares income from sales to the fixed costs of doing business. The five components of break-even analysis are fixed costs, variable costs, revenue, contribution margin, and break-even point (BEP).

Learn financial statement modeling, DCF, M&A, LBO, Comps and Excel shortcuts. The incremental revenue beyond the break-even point (BEP) contributes toward the accumulation of more profits for the company. An unprofitable business eventually runs out of cash on hand, and its operations can no longer be sustained (e.g., compensating employees, purchasing inventory, paying office rent on time). There is no net loss or gain at the break-even point (BEP), but the company is now operating at a profit from that point onward. In accounting, the margin of safety is the difference between actual sales and break-even sales. Managers utilize the margin of safety to know how much sales can decrease before the company or project becomes unprofitable.

Free Financial Modeling Lessons

1. The basic objective of break-even point analysis is to ascertain the number of units of products that must be sold for the company to operate without loss.
2. The calculation is useful when trading in or creating a strategy to buy options or a fixed-income security product.
3. The put position’s breakeven price is $180 minus the $4 premium, or $176.
4. A financial professional will offer guidance based on the information provided and offer a no-obligation call to better understand your situation.
5. The break-even point (BEP) is the amount of product or service sales a business needs to make to begin earning more than you spend.
6. Some common fixed costs are your rent payments, insurance payments and money spent on equipment.

The articles and research support materials available on this site are educational and are not intended to be investment or tax advice. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. If the same cost data are available as in the example on the algebraic method, then the contribution is the same (i.e., $16).

Understanding Break-Even Analysis

Adam received his master’s in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew gross profit percentage University in Jerusalem. Someone on our team will connect you with a financial professional in our network holding the correct designation and expertise. Our writing and editorial staff are a team of experts holding advanced financial designations and have written for most major financial media publications. Our work has been directly cited by organizations including Entrepreneur, Business Insider, Investopedia, Forbes, CNBC, and many others.

The relationship between contribution margin and breakeven point is that even a dollar of contribution margin chips away at a company’s fixed cost. A higher contribution reduces the number of units needed to break even because each unit contributes more towards covering fixed costs. Conversely, a lower contribution margin increases the breakeven point, requiring more units to be sold to cover fixed costs.

The break-even point can be affected by a number of factors, including changes in fixed and variable costs, price, and sales volume. In contrast to fixed costs, variable costs increase (or decrease) based on the number of units sold. If customer demand and sales are higher for the company in a certain period, its variable costs will also move in the same direction and increase (and vice versa). Break-even analysis helps businesses choose pricing strategies, and manage costs and operations.

Assume that an investor pays a $5 premium for factoring software made powerfully simple try it today an Apple stock (AAPL) call option with a $170 strike price. This means that the investor has the right to buy 100 shares of Apple at $170 per share at any time before the options expire. The breakeven point for the call option is the $170 strike price plus the $5 call premium, or $175. If the stock is trading below this, then the benefit of the option has not exceeded its cost.