What is Break Even Analysis Formula? Calculate in 2 Steps

What Is Break Even Analysis Formula?

As a regular Excel user, if you are looking to make smart business choices, you should know the costs and benefits of your options. Or you may be a small business owner or finance head of startup, a break even analysis in Excel can show you when this company will start turning a profit on a specific product or service.

Ok let us walk you through how to do a break-even analysis in Excel. We will give you an example scenario to help explain how it all works tough. Here we will show you how to perform a break-even analysis in Excel.

break even analysis formula: break-even analysis

In case you wanna make smarter decisions in your business or company you work, it is important to understand your break even point. Using break even analysis is super helpful for Excel users. Because it gives you a clear picture if you are making profit. Also, it helps you understand your costs versus your sales. So, you can make smarter decisions about pricing, budgeting and planning.

Overall, we can say it is a key tool for anyone looking to analyze data in more meaningful way.

break even analysis example

Moreover, this article will show you how to do a break-even analysis in Excel and explain what it all means. With this knowledge, you can project your company’s future profits and losses more accurately.



What Is Break Even Analysis Formula?

What is the break even analysis formula? break even analysis example

A break-even analysis is a tool for businesses in order to calculate the point at which they will start to make a profit on a product or service. Furthermore, this analysis considers all the fixed and variable costs with producing and selling a product or service. Once these costs are clear out there, the break-even point can be calculated by dividing the total fixed costs by the price per unit minus the variable costs per unit.

Why is it important for businesses to conduct a break-even analysis?

There are a few reasons for doing break even analysis. First of all, this calculation can tell how much revenue you need to start making a profit. This is important for business owners and managers. Because they set sales goals and plan for profit.

Also, this break even analysis formula can help you learn minimum number of units to sell for starting if you wanna profit. So you can make adjustments to pricing and production. And also it will help businesses assess the financial risk in case they wanna launch a new product for instance.

How to create a break-even analysis in Excel

Now that we know what break-even analysis is and why it is important for businesses, it is time to learn how the calculation works in Excel as well as in other mediums. The first step is gathering all relevant data. Such as fixed costs, variable costs and selling price per unit. Finally, once this data is here, it can be entered into an Excel spreadsheet.

The different components of a break even analysis excel

Three main components calculate the break-even point. These are fixed costs, variable costs and selling price per unit. Fixed costs are those expenses that remain the same regardless of how many units are produced or sold. These costs include rent, insurance, salaries and loan payments.

break even point analysis template

Moreover, variable costs tough can change based on the number of units produced or sold. These costs include materials, supplies and commissions. Moreover, the selling price per unit is the amount of money that will be charged for each unit of the product or service. This price needs to be high enough to cover both the fixed and variable of production while still providing a profit for the business.

How to use break even point analysis excel to make better business decisions

Once the break-even point is clear out there, businesses can use this information to make better decisions about pricing, production and sales goals. For example, if a business wants to increase its profits, it can either sell more units or increase the selling price per unit. Also, you can use this calculation to help businesses assess the financial risk regarding launching a new product or service. If the break-even point is too high, it may not be worth it to go through with the launch.

An example break even formula excel to illustrate how this calculation works

Ok, now we covered the theory part of this formula. So now, we will look at an example to see how this calculation works in practice. If your business has fixed costs of $10,000 and variable costs of $2 per unit. And the selling price per unit is $5.  So when we are using this information, we can calculate the break-even point as follows:

  1. Break-Even Point = Fixed Costs / (Selling Price Per Unit – Variable Costs Per Unit)
  2. Break-Even Point = $10,000 / ($5 – $2)
  3. Break-Even Point = 10,000 / 3
  4. Break-Even Point = 3,333 units

This means that the business needs to sell 3,333 units to cover its costs and start making a profit. If the business wants to increase its profits let’s say, it can increase its sales volume or raise its prices.

This article has been a guide on how to use break-even analysis for business owners or finance employees of any business or startup. You may learn more about Excel from the following articles as below.



Break Links in Excel 

What is a barcode, and what are they used for?

What is the Box and Whisker Plot in Excel?

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