Break-Even Analysis: Definition and Formula

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. While the breakeven point is a valuable tool for decision-making, it has several limitations. One major downside is its reliance on the assumption that costs can be neatly divided into fixed and variable categories.

What is a Sales Cycle? (Explained With Examples)

Break-even analysis formulas can help you compare different pricing strategies. Get instant access to video lessons taught by experienced investment bankers. Learn financial statement modeling, DCF, M&A, LBO, Comps and Excel shortcuts. If a company has reached its break-even point, the company is operating at neither a net loss nor a net gain (i.e. “broken even”). 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).

Let’s say that we have a company that sells products priced at $20.00 per unit, so revenue will be equal to the number of units sold multiplied by the $20.00 price tag. The Break-Even Point (BEP) is the inflection point at which the revenue output of a company is equal to its total costs and starts to generate a profit. For the example of Maggie’s Mugs, she paid $5 per mug and $10 for them to be painted.

That allows the put buyer to sell 100 shares of Meta stock (META) at $180 per share until the option’s expiration date. The put position’s breakeven price is $180 minus the $4 premium, or $176. If the stock is trading above that price, then the benefit of the option has not exceeded its cost. Although investors may not be interested in an individual company’s break-even analysis of production, they may use the calculation to determine at what price they will break even on a trade or investment.

Stock Market Breakeven Points

Once you reach this point, you’re usually ready to scale toward profitability—and that’s exciting. It’s the tipping point where you’re no longer losing money, but are not yet making a profit. Below, we’ll cover everything you need to know about break-even point to calculate your own (with a simple formula) and use it to guide your business toward smarter decisions. Someone on our team will connect you with a financial professional in our network holding the correct designation and expertise. Our mission is to empower readers with the most factual and reliable financial information possible to help them make informed decisions for their individual needs. Our writing and editorial staff are a team of experts holding advanced financial designations and have written for most major financial media publications.

1. The calculation is useful when trading in or creating a strategy to buy options or a fixed-income security product.
2. Moreover, the break-even point does not take into account other factors such as cash flow, profit margins, and return on investment.
3. Once the break-even number of units is determined, the company then knows what sales target it needs to set in order to generate profit and reach the company’s financial goals.
4. You can use the break-even point to find the number of sales you need to make to completely cover your expenses and start making profit.
5. 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.

How to calculate the break-even point

In effect, the insights derived from performing break-even analysis enables a company’s management team to set more concrete sales goals since a specific number to target was determined. «When will we actually make money?» is the burning question for new businesses. Fortunately, you can answer this question by calculating your break-even point. In accounting, the margin of safety is the difference between actual sales and break-even sales.

Break-even point formula example

Businesses share the similar core objective of eventually becoming profitable in order to continue operating. Otherwise, the business will need to wind-down since the current business model is not sustainable. 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. Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader.

Note that in the prior example, the fixed costs are «paid for» by the contribution margin. The more profit a company makes on its units, the fewer it needs to sell to break even. The relationship between contribution margin and breakeven point is that even a dollar of contribution rationalizing fraud 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.

If she keeps falling short of the 500 units needed to break even, she could potentially find a cheaper mug supplier or painters who are willing to take a lesser payment. By reducing her variable costs, Maggie would reduce the break-even point and she wouldn’t need to sell so many units to break even. If your sales price is too low, you might have to sell too many units to break even.

In stock and options trading, break-even analysis helps third-party determine the minimum price movements required to cover trading costs and make a profit. Traders can use break-even analysis to set realistic profit targets, manage risk, and make informed trading decisions. Assume a company has $1 million in fixed costs and a gross margin of 37%. In this breakeven point example, the company must generate $2.7 million in revenue to cover its fixed and variable costs. The break-even point can be affected by a number of factors, including changes in fixed and variable costs, price, and sales volume.

Break-even analysis ignores external factors such as competition, market demand, and changes in consumer preferences. When companies calculate the BEP, they identify the amount of sales required to cover all fixed costs before profit generation can begin. The break-even point formula can determine the BEP in product units or sales dollars. In the consulting industry, a firm’s fixed costs may include office rent, salaries, and professional liability insurance, totaling $10,000 per month. The variable costs per project, including travel expenses and subcontractor fees, amount to $5,000. There is also a category of costs that falls in between, known as semi-variable costs (also known as semi-fixed costs or mixed costs).

A breakeven point calculation is often done by also including the costs of any fees, commissions, taxes, and in some cases, the effects of inflation. A breakeven point tells you what price level, yield, profit, or other metric must be achieved not to lose any money—or to make back an initial investment on a trade or project. Thus, if a project costs $1 million to undertake, it would need to generate $1 million in net profits before it breaks even.