The break-even point

The break-even point is the level of sales at which a business’s income equals its costs, so it makes neither a profit nor a loss. Business Queensland’s simple formula divides fixed costs by the gross profit margin.

A guide published by Dotto. General information, not tax or financial advice. Business Queensland calls its formula a simplified one and suggests talking to an accountant, bookkeeper or tax agent when planning.

The load: Fixed costs
The counterweight: Gross profit on each dollar of sales
The reading: The sales at which the beam sits level

Notch 2 of 6 on the steelyard.

Where the beam sits level

business.gov.au defines the break-even point in a line, as the point when a business’s income equals its expenses. Business Queensland describes it as the point where total revenue (sales or turnover) equals total costs, with no profit and no loss, and warns that a business can turn over a lot of money and still run at a loss.

Its formula for a quick reading is break-even point = fixed costs ÷ gross profit margin, and it offers a calculator for it. The margin is gross profit as a share of total revenue, where gross profit is revenue less the cost of goods sold.

The two kinds of cost

The formula depends on sorting costs into those that stay put and those that move with sales. Business Queensland gives examples of each, in this order.

Fixed and variable expenses, as Business Queensland lists them
Kind	How it behaves	Examples it gives
Fixed expenses (overheads)	Stay the same however many items are made or sales are made	Rent; maintenance of the workplace; insurance and accounting; licence fees; utilities such as electricity, water and internet; depreciation
Variable expenses	Rise and fall with the number of items produced or sales made	Labour; raw materials; advertising; packaging; freight or delivery; electricity
Cost of goods sold	Relate directly to sales	Stock and materials from suppliers; freight and delivery to bring supplies in

Electricity appears twice on purpose. Business Queensland notes that utilities are usually fixed, but can rise with production, for example when equipment runs for longer.

Business Queensland’s bakery, weighed

Business Queensland’s pages use an example business, Brett’s Bakery, with total revenue of $450,000. Its raw materials and the wages directly involved in baking and selling cost $300,000, leaving a gross profit of $150,000, a margin the pages round to 33%. Total operating expenses of $405,000 leave a net profit of $45,000.

The pages do not give the bakery’s fixed costs on their own, and they do not say whether the $405,000 includes the $300,000 of goods and direct wages. This guide reads it as including them, since $450,000 less $405,000 is the $45,000 net profit the pages state. Taking the $300,000 out of the $405,000 then leaves $105,000 of other running costs, and the docket below treats all of it as fixed. Both the reading and the split are this guide’s assumptions, made only to show the formula at work.

Brett’s Bakery at break-even: this guide’s arithmetic on Business Queensland’s figures

Total revenue: $450,000
Gross profit: $150,000
Gross profit margin ($150,000 ÷ $450,000): one third
Fixed costs (assumed, as above): $105,000
Break-even sales: $315,000

$105,000 ÷ ⅓ = $315,000. At $315,000 of sales, gross profit at the same margin is $105,000, which just covers the fixed costs. Using the rounded 33% instead gives about $318,182, so the rounding alone moves the answer by about $3,200.

What the point helps a business see

Business Queensland lists what identifying the break-even point helps a business work out. Its list, in full:

“your profitable product lines”

“how far sales can decline before you start to make a loss”

“the number of units you need to sell before you make a profit”

“if reducing price or volume of sales will impact your profit”

“how much of an increase in price or volume of sales you will need to make up for an increase in fixed costs.”

Business Queensland, Break-even and profit. © State of Queensland, CC BY 4.0.

The last line is where a business’s own spending meets the break-even point. An outlay that adds to fixed costs raises the sales needed to break even, and depreciation, the yearly share of an asset’s cost, is on Business Queensland’s list of fixed expenses. As an illustration using its formula: at a gross profit margin of one third, every extra $1 of fixed cost needs $3 of extra sales before the business is back where it started.

From break-even to a profit goal

Business Queensland carries the formula one step further, to the minimum sales a business needs to reach a profit goal: (fixed costs + profit goal) ÷ gross profit margin. The sales have to cover fixed costs, the owner’s salary and the profit wanted, and once the break-even point is known it suggests deciding what return on investment is reasonable for the level of risk.

Its steps to meet a profit goal, quoted in its order:

“Set a profit goal.”
“Calculate your gross profit margin for your products to identify which products to focus on for maximum profit.”
“Calculate your fixed and variable costs.”
“Calculate your minimum number of sales to break even (use your turnover to help calculate this).”
“Calculate your total number of sales required to achieve your profit goal.”

Where the simple formula stops

One margin for the whole business assumes every sale earns the same share. Business Queensland’s own bakery table shows how far that can be from true: sweet rolls cost $0.50 to make and sell for $2.00, a 75% margin, while savoury rolls cost $1.50 and also sell for $2.00, a 25% margin. It suggests checking the margin of each product, not only the business’s overall figure, to judge which items are worth making.

The break-even point also says nothing about how long it takes to get there, or what the spending returns once it does. Those are the questions of return on investment and of payback.