Break Even Point Analysis in economics, business, and cost accounting refers to the point in which total cost and total revenue are equal. A break even point analysis is used to determine the number of units or dollars of revenue needed to cover total costs (fixed and variable costs).
Formula for Break Even Point
Break even quantity = Fixed costs / (Sales price per unit – Variable cost per unit)
Where
- Fixed costs are costs that do not change with varying output (e.g., salary, rent, building machinery).
- Sales price per unit is the selling price (unit selling price) per unit.
- Variable cost per unit is the variable costs incurred to create a unit.