Once a firm knows its total costs and revenue it can calculate the break-even point

This is defined as: “Break-Even occurs when Total Costs are equal to Total Revenue”

In effect, the business is neither making a profit or a loss.

Which means: Profit = 0

Break-Even = Fixed Costs ÷ Price – Variable Cost per Unit

Fast4cast break even calculator

Example:

SplashUK makes and sells a small range of inflatables.

It has worked out the following costs for its best selling inflatable ‘Lenny the Lilo’

Fixed costs is £20,150 per week

Variable costs: £5.50 per ‘Lenny the Lilo’

Selling price: £12

Here is a graph I created with these figures on Fast4cast.com

Due to the recent times the variable cost has risen to £7 and the selling price down to £10, here is the new graph.

The revenue and costs lines are tighter and closer now, this reflects the profit margin decrease as the variable costs has increased and the selling price decreased due to recent times. Units sold had recently dipped so a reduction had to occur. Unfortunately due to the recession the goods stock prices from the wholesalers had increased.

After time, the wholesalers reduced their prices as SplashUK became loyal customers. Interest in the items had grown so SplashUK could increase their prices as customers bought the products consistently. Here is a new graph in the other direction, the new figures are variable costs: £4.50, selling price: £15.

The green/red divide is far greater as the profit margin is larger.