Break even point of a company its purpose methods and elements

Break even point

The break-even point is established through a calculation that serves to define the moment in which a company’s income covers its fixed and variable expenses, that is, when you manage to sell the same as you spend, you neither win nor lose, you have reached the breakeven.

How to Calculate Break even point in Units?

The term equilibrium point in units is implemented to define the moment in which companies achieved that their income and expenses remain at the same level, that is, they have no profits, but neither losses.

The equilibrium point is not a goal to be achieved, on the contrary, entrepreneurs see it as the beginning of the objectives to achieve confidence in their goods and services , that is why it is a calculation that is carried out constantly in the annual contributions.

Despite this, it can be calculated in the short term , from weekly to quarterly, depending on what your company needs to maintain the correct level of stability throughout the year.

What is the breakeven point for?

Doing this calculation will allow you to make an evaluation of the profitability of a business, so you will know when you need to sell to start generating profits. On the other hand, it is functional to confirm if the idea you have to undertake is financially convenient.

Making use of the breakeven point also allows you to have a contingency base plan for low sales seasons, reducing the impact of negative economic times, allowing you to have strategies to face them more effectively and quickly.

How to calculate the breakeven point of a company?

If you want to calculate the equilibrium point, you must know the fixed and variable costs of the business or enterprise, which are obtained in three ways:

  • Annual
  • Monthly
  • Quarterly

This calculation is based on the gross margin percentage that is applied to the general breakeven formula. To do the calculation with several products is a bit more complex than with a single product.

Methods for calculating the breakeven point

To determine or calculate the Break even point you can apply any of these methods:

  • Equation method : it is the most direct way of doing the analysis, since it can be adapted to any situation within the conceivable cost, volume or profit.
  • The Contribution Margin method : it is a variation on the common equation. It consists of making a division with the fixed costs and the unit contribution margin.
  • Graphical method : since it can be represented and calculated in graphs, only data such as operational costs and sales income are required.

Break even point elements

The main factors are:

  • Fixed expenses : these have no variations month after month, on the contrary, their value remains the same at all times.
  • Variable expenses : they can vary each month depending on the invoices made by the company. It is directly related to the sales made, increasing or decreasing according to them.

From the calculation made between these, the following are obtained:

  • Total costs : when the fixed and variable expenses are added, the total costs are obtained, with which the company’s breakeven point can be deducted. This means that the income must be equal to the total costs.

This is one of the simplest ways to achieve the break-even point per unit, where you must obtain the unit variable price through the division between the number of units and the variable cost, all this in a given period of time.

Formula to calculate the Break even point in UNITS

You can use these two formulas to calculate the breakeven point :

(Pvu x U) – (Cvu x U) -CF = 0
Qe = CF / (Pvu-Cvu)

And from them you can get:

  • PVU : which is the unit sales price.
  • CVU : is the value of the unit variable cost.
  • CF : refers to fixed costs.

This formula will give you a result in units , that is, it refers to the breakeven units, the amount of the product that you must sell so that the income and costs are equal.

With this value, PE can be calculated in monetary terms, multiplying these units by the sale price.

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