This is the volume of sales (the level of product sold) made when the total sales revenue becomes equal to the total cost of product. The break-even point helps us determine the amount of products needed to be sold in order to recover the fixed and the variable costs.
Any revenue generated beyond this break-even point results into profit.
Graphical representation:
Image from simplestudies.com
Calculating break-even point
Break-even point = Total Fixed Cost per month / (Selling Price per unit - Average Variable Cost per unit )
TFC / (SP - AVC)
A company's total fixed cost for manufacturing a T-shirt is £500 each month and the total variable cost for manufacturing 1000 T-shirts for that month is £2,500. If the company decides to sell each T-Shirt for £7.50 or £5 each. What is their break-even point?
Calculating break-even point if selling price is £5:
Average Variable Cost per unit = Total Variable Cost / Total Number of Units manufactured
AVC = TVC /TNU
AVC = £2500 / 1000
AVC = £2.50
Break-even point = TFC / (SP - AVC)
Break-even point = £500 / (£5 - £2.50)
Break-even point = £500 / £2.50
Break-even point = 200 units
Total revenue at break-even point will be (200 x £5.00) £1000
Calculating break-even point if selling price is £7.50:
Average Variable Cost per unit = Total Variable Cost / Total Number of Units manufactured
AVC = £2500 / 1000
AVC = £2.50
Break-even point = TFC / (SP - AVC)
Break-even point = £500 / (£7.50 - £2.50)
Break-even point = £500 / £5.00
Break-even point = 100 units
Total revenue at break-even point will be (100 x £7.50) £750
Analysis
For the first calculation, to sell each T-Shirt at £5.00 each, 200 T-shirts has to be sold for the company to recover its fixed and variable cost. Also for the company to start generating profit, more then 200 T-shirts have to be sold and the sales revenue must be more than £1000
For the second calculation, to sell each T-Shirt at £7.50 each, 100 T-shirts has to be sold for the company to recover its fixed and variable cost. Also for the company to start generating profit, more then 100 T-shirts have to be sold and the sales revenue must be more than £750
Click to see how to determine your selling price and how to calculate markup percentage
Break-even point = Total Fixed Cost per month / (Selling Price per unit - Average Variable Cost per unit )
TFC / (SP - AVC)
A company's total fixed cost for manufacturing a T-shirt is £500 each month and the total variable cost for manufacturing 1000 T-shirts for that month is £2,500. If the company decides to sell each T-Shirt for £7.50 or £5 each. What is their break-even point?
Calculating break-even point if selling price is £5:
Average Variable Cost per unit = Total Variable Cost / Total Number of Units manufactured
AVC = TVC /TNU
AVC = £2500 / 1000
AVC = £2.50
Break-even point = TFC / (SP - AVC)
Break-even point = £500 / (£5 - £2.50)
Break-even point = £500 / £2.50
Break-even point = 200 units
Total revenue at break-even point will be (200 x £5.00) £1000
Calculating break-even point if selling price is £7.50:
Average Variable Cost per unit = Total Variable Cost / Total Number of Units manufactured
AVC = £2500 / 1000
AVC = £2.50
Break-even point = TFC / (SP - AVC)
Break-even point = £500 / (£7.50 - £2.50)
Break-even point = £500 / £5.00
Break-even point = 100 units
Total revenue at break-even point will be (100 x £7.50) £750
Analysis
For the first calculation, to sell each T-Shirt at £5.00 each, 200 T-shirts has to be sold for the company to recover its fixed and variable cost. Also for the company to start generating profit, more then 200 T-shirts have to be sold and the sales revenue must be more than £1000
For the second calculation, to sell each T-Shirt at £7.50 each, 100 T-shirts has to be sold for the company to recover its fixed and variable cost. Also for the company to start generating profit, more then 100 T-shirts have to be sold and the sales revenue must be more than £750
Click to see how to determine your selling price and how to calculate markup percentage
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