What is Breakeven Cost?
Breakeven cost is the point at which the cost of a good equals the amount received from it. That is a point where the sales revenue equals the cost of production. Any further sales income from that given point will be considered pure gain (profit).
Where sales revenue refers to the total cash inflow generated from the sale of a business’s commodities. While the cost of production refers to all cash outflow that went into the production of the commodities; things like labor, raw materials, machinery, among other expenses.
Knowledge of a business’ breakeven cost is important to ensure it (the business) remains financially sound and does not run into losses. By simply avoiding spending too much on production, while not getting enough cash flow from sales to cover its operating costs.
Breakeven cost is calculated against a backdrop of a clear understanding of the company’s business model. This knowledge then informs the decision the company will make with regards to the minimum quantity and price for its commodities in the market.
What is a Breakeven Calculator?
A breakeven calculator is a financial tool that shows you how many units you need to sell, and at what price, in order for your business to break even. The breakeven point is where your total sales revenue equals to your total cost of production.
In the analysis by the breakeven calculator, both fixed and variable costs are taken into account. In order to determine the right price and quantity of goods that must be sold for the business to break even.
The breakeven calculator can also show you how long it will take for a business venture to break even. This feature is particularly useful for investors weighing between various risks and need to know how long it will take before a particular venture earns them back their money.
For example, a farmer may use the Breakeven tool to determine if the price of wheat needs to rise in order for him or her to be able to buy a new tractor. Or, a business owner may use the Breakeven tool to determine if he should take out a loan and invest in more equipment or hire more employees.
Features
- Determine the breakeven date
- Add a future value amount
- View results in chart format
- Save your work and return to it later
- Update past results using new information
The calculator also takes into account interest payments on borrowed capital, labor costs, and depreciation on assets, among other hidden costs.
How does Breakeven Calculator Work?
How does Breakeven Calculator work? Effortless. Just choose a scenario and you’ll see how much it will cost to break even, what your profit will be, among other useful statistics. Thereby, helping you manage your business costs.
It does that by recording the business’ expenses versus the income. Then it accurately determines how long it will take for the business to offset its costs of production. You can also estimate the expected units of products and their prices required to break even.
The breakeven calculator uses the most advanced software and high-end calculators to give you the latest and most accurate information on various assumptions for competing projects or investments.
What is the Break Even Point?
The Break-Even Point is the point at which your monthly income covers your basic needs.
For example, assume you make $100 a year trying to sell homemade sweaters in order to make enough to live on but ultimately they keep you broke.
You’ll spend $75 on yarn and $25 on utilities, and in an average month, there is $0 leftover for rent or groceries. But if you were able to sell twenty sweaters a month, it would be profitable and your Break-Even Point was twenty sweaters!
How can the Break Even Point Help your Business?
As a manager or entrepreneur, you want to know when you need to be generating more revenue or reducing your costs in order to cover your expenses and start seeing a profit. By using the break-even calculator, you can see exactly at what point you need to reach in order to be in the black.
With this knowledge, you can put processes and procedures in place that will allow you to hit those numbers. The Break-Even Point is a relatively simple way to calculate how many units of goods you need to sell in order to make a profit,
For any business, it is essential to understand the essential financial metrics that indicate whether a company is successful or failing. The break-even point (BEP) is one such metric that allows managers to make well-informed decisions regarding short-term and long-term strategies.
Break-Even Point Examples
- If you produce 500 units at $100 each, your total cost of production will be $5,000 ($100 x 500). If you are selling each unit at $175, then you will have to sell about 28 units to break even.
- Suppose you borrow $100 from a friend. At 10% interest, this is equivalent to paying $10 per year for the use of the money. If you gained the same $10 from interest on a savings account at 4%, or from dividends on stock paying 5%, or from a TIPS paying 3% inflation-matching returns, you’d be indifferent between borrowing and not borrowing. This is your break-even point—the rate at which you’re indifferent to taking out the loan.
FAQs
How do you calculate break-even cost?
When calculating break even cost, you must first know the price and quantity of your fixed costs, including rent, labor, and equipment costs. Then, you calculate the variable cost of each unit based on your production volume and average per-unit selling price. Once you know the total variable cost per unit, divide it by your desired profit margin to arrive at the break even cost.
What is the break even calculator?
A break even calculator, also referred to as a profit calculator, is a tool that helps estimate the exact time it will take for your initial investment, or start-up costs, to pay for itself. This estimate does not include any profits from sales. Understanding this time period can affect many decisions, including what type of business to open and which payment plan to use.
How do you calculate break-even example?
Break even Quantity = Fixed costs / (Sales Price per Unit – Variable Cost per Unit)
