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## How To Compute Your Company’s Breakeven Point

Breakeven analysis can be useful when investing in new equipment, launching a new product, or analyzing the effects of a cost reduction plan. During the COVID-19 pandemic, however, many struggling companies are using it to evaluate how much longer they can afford to keep their doors open.

Fixed vs. Variable Costs
Breakeven can be explained in a few different ways using information from your company’s income statement. It is the point at which total sales are equal to total expenses. More specifically, it is where net income is equal to zero and sales are equal to variable costs plus fixed costs.

To calculate your breakeven point, you need to understand a few terms:

Fixed expenses: These are the expenses that remain relatively unchanged with changes in your business volume. Examples include rent, property taxes, salaries, and insurance.

Variable/semi-fixed expenses: Your sales volume determines the ebb and flow of these expenses. If you had no sales revenue, you would have no variable expenses and your semifixed expenses would be lower. Examples are shipping costs, materials, supplies, and independent contractor fees.

Breakeven Formula
The basic formula for calculating the breakeven point is:

Breakeven = fixed expenses / [1 – (variable expenses / sales)]

Breakeven can be computed on various levels. For example, you can estimate it for your company overall or by product line or division, as long as you have requisite sales and cost data broken down.

To illustrate how this formula works, let us suppose ABC Company generates \$24 million in revenue, has fixed costs of \$2 million, and variable costs of \$21.6 million. Here is how those numbers fit into the breakeven formula:

Annual breakeven = \$2 million / [1 – (\$21.6 million / \$24 million)] = \$20 million

Monthly breakeven = \$20 million / 12 = \$1,666,667

As long as expenses stay within budget, the breakeven point will be reliable. In the example, variable expenses must remain at 90 percent of revenue and fixed expenses must stay at \$2 million. If either of these variables changes, the breakeven point will change.