## What does breaking even mean?

When a business breaks even, it means that their expenses equal their revenue. By calculating your breaking even point you will know how many units you need to sell in order to balance the books.

If a business knows that they need to sell 500 units to breakeven, then any sold above this point is classed as profit. However, if the target of 500 units is not met then the business has made a loss.

We can work out our breakeven point by either calculating how many units we need to sell, or the amount of money we need to make.

## How to calculate when you breakeven

Weโll use an Artist selling CDs as an example.

To calculate how many products you need to sell in order to breakeven, firstly you need to work out your fixed costs.

Your fixed costs are amounts relating to your product that doesnโt change, regardless of the amount of units sold. In our example of an Artist selling CDs, a fixed cost would be the music production of the album, cost to hire out a studio, graphic design for the album etc.

In our example our fixed costs are $5,000.

Next we need to calculate our variable cost per unit, which are expenses that apply to the individual product when sold. For example, for a CD you would have manufacturing costs, VAT (if you live in the UK), packaging and delivery etc. All these costs apply to each product sold.

In our example our variable cost per unit is $8.

Next we need to know the selling price of the product, in our example itโs $12 per CD.

### Calculating breakeven point in units

To calculate our breakeven point in units weโd take the selling price of $12 and deduct the variable cost per unit of $8, this leaves us with $4. Next we take our fixed costs and divide it by 4, which gives us 1,250. This means the Artist would need to sell 1,250 CDs to breakeven.

$5000 / ($12 – $8)

$5000 / 4 = 1,250 units

Fixed costs / (selling price - variable cost) = units to sell to breakeven

### Calculating breakeven point in money

To calculate our breakeven point in terms of money weโd take the fixed costs and divide it by the contribution margin.

To calculate the contribution margin we take the selling price per unit and deduct the variable cost per unit, in our example this is $4, then this number is divided by the selling price which gives us a contribution margin of 0.3333 (to 4 decimal places).

Therefore, we take $5,000 and divide it by 0.3333 which equals $15,001.50. This means the Artist needs to sell just over $15,000 of CDs to breakeven.

$5000 / 0.3333 = $15,001.50

Fixed costs / contribution margin = money to make to breakeven

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