The break-even formula
Break-even units = fixed costs ÷ (selling price − variable cost per unit)
Break-even sales = break-even units × selling price
The gap between price and variable cost is the contribution each unit makes towards fixed costs. Example: fixed costs of ₹6,00,000, a price of ₹450 and a variable cost of ₹300 give a contribution of ₹150 a unit. Break-even = 6,00,000 ÷ 150 = 4,000 units, or ₹18,00,000 of sales.
Units needed for a target profit
Units for target profit = (fixed costs + target profit) ÷ contribution per unit
For a profit of ₹1,50,000: (6,00,000 + 1,50,000) ÷ 150 = 5,000 units.
The margin of safety is how far expected sales are above break-even. Selling 5,000 units against a break-even of 4,000 gives a margin of safety of 1,000 units, or 20%.
Using break-even in a manufacturing business
- Price a new product by checking the volume it must sell to cover the extra fixed cost it brings.
- Judge a new machine: its EMI and running costs add to fixed costs. How many more units must you sell to stay at break-even? Use the EMI calculator for the repayment.
- Watch variable cost. A rise in material prices cuts contribution and pushes break-even up. A 10% rise in variable cost in the example above raises break-even from 4,000 to 5,000 units.
- Use real costs. Break-even is only as good as the variable cost you put in. Actual material use and scrap per job, recorded in your ERP, make it reliable.