The break-even point is the point where total cost and total revenue become equal in a business. Meaning the business is neither taking a loss nor making a profit.
If the cost of production is ₹500,000 and the revenue is also ₹500,000, then we can say that the business has reached its break-even point. After this point, a business generally aims to make profits. So this point is one of the most important milestones in a business.
Calculating the break-even point gives a clear understanding of the goals in a business.
- How many units a business must sell to reach the break-even point?
- What is the amount of sales a business requires to reach the break-even point?
Depending upon the answers an entrepreneur or an investor can forecast,
- How long it will take for the business to break-even, and start making profits?
Because some businesses may take many years to reach the break-even point, and some may reach the break-even point within a few months. As per this calculation, entrepreneurs can strategize the business roadmap accordingly.
Here are the formulas to calculate the break-even point,
Units to be sold for break-even = Fixed Cost/(Selling Price-Variable Cost)
Amount of sales to reach break-even = Fixed Cost/((Selling Price-Variable Cost)/Selling Price)
