Calculating break-even point

Firstly lets look at the terms used in this post:

The Break-Even point in sales volume is defined as:

 That point in sales volume, or revenue, where direct costs have been recovered, fixed overhead expenses have been absorbed and where profit begins”

Contribution is the SALES less VARIABLE COSTS

Contribution is so called as it literally does contribute towards fixed costs and profit, As sales revenue grow from zero, the contribution also grows until it just covers the fixed costs. This is the break-even point where neither profits or losses are made.

It follows that to break-even the contribution must exactly equal the amount of fixed costs. If we know how much the contribution is for each unit sold, then we can calculate the amount of units required to break even as follows.

Break even point in units = fixed costs / contribution per unit

For example if an organisation manufactures a single product, incurring variable costs of €50 per unit and fixed costs of €10,000 per month. Of the product sells for €100 per unit then the break even point can be calculated as follows.

= 10,000 / 50
so the break even point is 200 units

Using Break-Even in Modeling:

The Break-Even formula can be used as a model to estimate the effect of major decisions on the financial status of the business such as adding a new location, making a capital investment, dropping or adding a product line. Simply estimate the changes in fixed and variable costs (and sales) that result from the decision and plug them into the Break-Even formula for your company. This can also help you set goals for the new operation.

In fact, ANY significant contemplated change in your cost structure resulting from a proposed decision can be modeled to determine the effect on the company’s financial results before the decision is made. You will know what you face and are required to overcome ahead of time. You will be able to set goals based on financial facts rather than intuition only.

Break even point can be shown graphically at at the point where the total revenue and total cost curves meet.

Limitations of Break Even Analysis:


It is best suited to the analysis of one product at a time. It may be difficult to classify a cost as all variable or all fixed; and there may be a tendency to continue to use a break even analysis after the cost and income functions have changed.


Break-Even Analysis

In every business there is a certain level of sales at which costs equal profits. This is know as the break-even point. Its simple to calculate and can be plotted on a break-even chart.

Lets assume an event firm is running a champagne reception. The selling price per ticket is €10. Each guest gets one glass of champagne and each glass costs €5. (Ignoring waste). The other costs to consider are the cost of the band (€100) and the hotel room rental (€200). The variable cost is the champagne as the more guests there are the more champagne we need to buy. The fixed cost is the hotel room and band.

The first step is to calculate the contribution per ticket.

Price of ticket €10
Less cost of champagne €5
Contribution per ticket €5

Now thats calculated we can look at the fixed costs
Hire of band €100
Hotel Room €200
Total Fixed costs €300

We know that for each ticket sold their is a contribution of €5. Obviously to calculate the break-even point we need to divide the total fixed costs by the contribution per ticket. So thats €300/€5 – 60 Guests.

In general the formula for finding break-even point is

Fixed Costs/ Contribution per unit.

Every little helps – Business Cost Saving

Sometimes in business we ignore the small things. A tiny overcharge on an invoice, a few euros off on the VAT but these small things can become material.

Today while working with a client I phoned one of his suppliers to get an €8 delivery charge removed from an invoice. This might seem very small but we also convinced the supplier to remove the delivery charge on a permanent basis as along as there is an agreed spend (the spend is necessary so no extra cost there.)

Although this started off as an €8 expense the saving from the negotiations is now €3,000 per annum, This was worth the phone call im sure you agree. Over the last week or two we have reduced the clients overhead, eliminated unprofitable work, reduced waste, decreased their tax bill and created management reports to allow focus on high margin work.

The net effect of this will be at least €30,000 a year on the bottom line. The cost of the consultancy to achieve this was 5% of the savings.

A good accountant should always cover their cost!

Think of the €30K saving the next time you have a small extra expense which you don’t bother sorting out.

If you require any assistance with cost saving or management reports please do not hesitate to email
or phone Ralph on 086-3336665

Management information and when to dump customers!

A large part of my work involves providing management with information allowing them to make strategic decisions.

I will provide a case study here which shows the benefit of that information:

One of my clients runs a distribution business supplying cleaning equipment, When I first arrived at this client her revenues were declining and profit margins were being squeezed to the point that the business was hemorrhaging cash at a frightening rate.  Basically if something wasnt done quickly she would be out of business in two months.

The obvious starting points were for me to negotiate hard with suppliers on her behalf to reduce the cost of goods sold. Often I have a distinct advantage with this as an outsider. It can be hard to lean on suppliers for discounts if you’ve built up a friendship with them. Once margins were improved by reducing costs, I tackled overheads and again reduced them to the bone.

At this point I examined her sales ledger. There was a vast amount of customers but a lot of them weren’t buying very much. To analyse the sales in greater detail I exported her entire sales and purchases ledger into a spreadsheet and manipulated the data using pivot tables. The glaringly obvious problem was the tiny gross profit being made on some of the sales calls.

Next step was to analyise the drivers routes. To do this I entered their entire routes into Google maps and calculated the mileage between each call.

The final table was a ratio of gross profit per call cross referenced with  the mileage to get to the call. This gave a very basic P&L per call.  From this table it was extremely obvious that the company was suffering vast losses by servicing certain customers when fuel and sales persons time were factored into the equation.

Fixing this wasn’t too difficult first step : Contact the customer and discuss the issue. Basically the goal of this call is to increase the customers value per order. If this means delivering once every two months instead of once a month then so be it. Eventually after negotiating improved terms with some customers and deciding not to service others, we were left with a sales person too many. A quick chat with the sales people and one was willing to take voluntary redundancy. (your not always that lucky!!)

The key point is analyise your customers individually and create a P&L for each one. If the customer isn’t contributing enough try to develop them. If they can’t be developed dump them. Remember Develop or Dump!

As always if you need any information please do not hesitate to contact me:


This is the Blog of an Accountant based in Galway providing Bookkeeping services and accountancy software


Working with clients I see them using all sorts of creative ways in trying to develop their sales price. Sometimes using mark up and margins sometimes licking their finger and holding it out the window.

Calculating a selling price using a gross margin is relatively simple = cost / (1-Gross Margin%) yet it still manages to confuse people.

For that reason I’ve added an extract from a very basic spreadsheet below

Please feel free to take a copy of this for your own use.