The breakeven formula is used to calculate the point at which revenues equal costs, known as the breakeven point. It is the point at which a business “breaks even,” or recovers the amount of money that has been put into the business.

** Remember**The breakeven point is the point at which a business may begin to turn a profit. Up until this point, costs have outpaced revenues.

Because profit is essentially surplus revenue, there has not (and cannot) be any profit while costs continue to exceed revenues. At the breakeven point revenues equal costs. There is no surplus revenue, so there is also no profit, but sales *after *the breakeven point *will *generate profit. Keep in mind, the breakeven point is by no means a guaranteed milestone for any business.

**Fixed Costs
**Fixed costs are costs that *do not *change with the number of units produced or sold—things like rent, salaries, or insurance. For the breakeven calculation, use a total of all fixed costs.

**Variable Costs
**Variable costs are costs that *do* change with the number of units produced or sold. For businesses that offer services instead of physical products, variable costs are costs that change with the number of services executed. These costs include production materials, components, supplies, and other consumables directly tied to production or service execution. For the breakeven calculation, variable costs are the total costs on a *per-unit basis*.

**Where:**
*Fixed costs* are the total fixed costs for the period
The *price* is the per-unit selling price
*Variable costs* are the total per-unit cost

## For Example – The Breakeven Equation In Action

An online retailer adds up her fixed costs including hosting for her online store and rent and utilities on the space she uses to store her inventory. Total fixed costs for an average month come to $3,980. Variable costs, including the cost to purchase and ship the products she sells, total $7.46 per unit, and she wants to sell them for $13.99 each. With our values plugged into the formula, the breakeven calculation appears as follows:** Question
**What if I want to determine the number of sales dollars I will have to reach to break even instead of expressing that threshold in units?

*Remember*Remember that the contribution margin is the denominator of the breakeven formula, or the price per unit minus the total variable costs per unit.

## For Example – Calculating a Breakeven Point in Dollars

Thinking back to our online retailer example, let’s calculate the same breakeven point in dollars instead of units. In determining the number of units needed to break even for the month, we calculated the contribution margin to be $6.53 and we know that the sales price per unit is $13.99. Plugging those numbers into our contribution margin ratio, we get a result of 46.68 percent.*Question***
**What if I want to determine the number of sales dollars needed to reach a certain profit threshold in dollars?

**New!**

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