The break-even point can help you visualise the relationship between various costs over time. It identifies the moment where you have recovered your total cost and begin making a profit, and is often displayed as a dollar amount on a graph.
There are two types of costs: fixed and variable. Fixed costs are those that do not change with time or sales and profits, such as the cost of purchasing standard machinery. Variable costs change over time and depend on sales volumes, such as purchasing materials and labour costs.
The following example explains how to calculate your break-even-point, using a hypothetical income statement that looks like this:
Cost of sold items: $60,000
Fixed expenses: $80,000
First, we’ll calculate the contribution margin, which is the percentage of sales available for use toward fixed cost and profit. In the above example, the variable costs are 50 per cent of sales so the contribution margin is 50 percent. The BE point is the fixed costs ($80,000) divided by the % of sales the variable costs represent (50%) which equals $160,000. Here, all fixed and variable costs are covered. To verify, multiply 50 percent by $160,000. The amount is the value of fixed costs or $80,000. The variable cost at this rate is $80,000 or 50% of $160,000.