Breakeven Analysis

The breakeven analysis is a calculation that forecasts the point at which a company’s total revenues are equal to its total expenses. Within this analysis are different variables such as fixed costs, variable unit costs, expected unit sales, unit price, total variable cost, total cost, total revenue, profit or loss and the breakeven point. Accurately pinpointing a breakeven point on a product allows a company to roughly determine when a profit will be made on that item.

Breakeven Analysis Formula

The breakeven analysis formula actually involves the use of several formulas. The first items that are necessary for an analysis are the fixed costs, variable unit costs, expected unit sales and unit price. Using the expected unit sales and variable unit costs you can compute the total variable cost as:

(Total Variable Cost = Expected Unit Sales x Variable Unit Costs).

Once you’ve established the total variable cost you can calculate the total cost by adding it to the fixed cost:

(Total Cost = Fixed Cost + Variable Cost).

Within the breakeven analysis you will also need to provide the total expected revenue. The formula for this uses the expected unit sales multiplied by the unit price:

(Total Expected Revenue = Expected Unit Sales x Unit Price).

From the total revenue you can calculate the profit or loss. The final formula in a breakeven analysis is the breakeven point. This is expressed using the fixed cost, unit price and variable unit cost:

(Breakeven point = Fixed Costs / (Unit Sales Price – Variable Costs))

Breakeven Analysis Example

The following is a breakeven analysis example that shows how easy it is to use the formulas. The Burger Empire hamburger lab has created a new and improved burger and as VP of marketing, your job is to present this new burger to the CFO of Burger Empire so that it can go immediately into production. You want to show a breakeven analysis for a one-year period. The unit sales price of the burger is $2.50. The fixed costs associated with producing the burger are $.25 per burger and the variable costs such as the price of beef are $.35 per burger. Your expected unit sales are 500 burgers per month over the next 12 months. By plugging these numbers into our formulas, we can create a breakeven analysis. Total Variable Cost over one year - Variable unit cost is $.35 per burger Expected unit sales are 500 x 12 = 6000

Total variable cost is 6000 x $.35 = $2100

Total Cost over one year – Fixed cost over one year is ($.25 x 500) x 12 = $1500

Total cost over one year is $1500 + $2100 = $3600

Expected Revenue over one year – 6000 x $2.50 = $15000 Profit or Loss over one year – 15000 – 3600 = 11400 Breakeven Point – $1500 / (2.50 - .35) = 697.67 (rounded up to 698) units sold to break even

As costs change over time you will need to adjust the figures appropriately, however, with the given outcome of the formula, you have enough information to chart a course on whether or not an item will be profitable. As with most financial formulas, there are breakeven analysis calculators available on the Internet. These calculators will also take into consideration more detailed variables that allow you to calculate the breakeven point more accurately.
Tim Ord
Ord Oracle

Tim Ord is a technical analyst and expert in the theories of chart analysis using price, volume, and a host of proprietary indicators as a guide...
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