**Break Even Sales Formula (Table of Contents)**

## What is the Break Even Sales Formula?

Break-Even Sales is a kind of financial analysis where it helps a firm or company to determine the point of sales where it shall neither incur profit nor incur losses or in other words, the level at which it shall recover its costs. The formula for Break-Even Sales (BES) in quantity is represented as below,

**Break-Even Sales Formula = FC / (ASP-AVC)**

Where,

- FC is the Fixed Cost
- ASP is the Average Selling Price per unit
- AVC is the Average Variable Cost per unit

The Break-Even Sales formula is very useful for manufacturing firms.

- The numerator of the formula is Fixed Cost which shall be incurred irrespective of whether a single unit is sold or not and hence that cost has to be recovered before the firm could start making profits.
- The denominator of the formula is contribution per unit which is a difference in selling price per unit and average variable cost per unit. As the Variable cost are those cost which is incurred only when the firm sells the units and hence the remaining would be the contribution and that shall be used to recover the fixed cost.

### Examples of Break-Even Sales Formula

Let’s see some simple to advanced practical examples to understand it better.

#### Example #1

**Suppose that sales per unit are 550 and the variable cost per unit is 350. The total fixed cost of the firm is 600,000. You are required to calculate Break-Even Sales in units based on the above information.**

**Solution**

Use the below-given data for calculation of Break Even Sales

Calculation of Break Even Sales can be done using below formula as,

=600000/(550-350)

**Break Even Sales will be –**

#### Example #2

**Thomas & Thomas are thinking to launch one of the below two products as their market capitalization has been hit by competition and now, they are looking back to bounce back in the market by introducing new products and increase shareholder’s value by increasing the firm’s profitability.**

Below are the details of the two products based on market research and estimation.

4.9 (927 ratings)

Since they are looking to add value to shareholders as soon as they can, they want to select the product which shall comparatively lower the sell of units in order to recover the cost.

You are required to calculate Break-Even Sales in units and advise which product should be launched?

**Solution:**

Here we are given to analyze two products and the one that takes a lesser number of units to sell to recover the cost, shall be selected for time being.

Now, we can calculate BES in units for both the products:

Calculation of Break Even Sales of Product X can be done using below formula as,

= 74880/(20 – 19)

**Break Even Sales of Product X will be –**

Calculation of Break Even Sales of Product Y can be done using below formula as,

- = 74,880 /(15 – 14.04)

Break Even Sales of Product Y will be –

**Break Even Sales = 78,000 units**

Based on the above comparison it appears that product X should be launched as it takes a lesser number of units to sell to recover the fixed cost of the firm.

**NOTE**

In this example, we are ignoring the gross profit margin, the firm could make otherwise selecting product Y if the profit margin is considered.

#### Example #3

**Veronica started a new business of selling hotdogs alone. She realized that most of the cost is variable and only fixed cost she would incur is the movable vehicle which she will use to do business. After operating business for the year, she has come out with the below details:**

She noticed that she incurred a loss of 10,000 after accounting for all the expenses and the take over at home was zero and in fact, she had to introduce 10,000 worth from home funds.

She desires to earn 50,000 net profit next year but before that she wants to know how she needs to how much she should sell so that she doesn’t incur losses next year. Assume that last year she sold 10,000 units.

You are required to calculate Break-Even Sales assuming the cost remains the same next year as well.

**Solution**

First, we need to compute the sales and variable cost per unit and also calculate the total fixed cost.

**Selling Price Per Unit**

=1000000/10000

**Selling Price Per Unit = 100**

**Average Variable Cost Per Unit**

=900000/10000

**Average Variable Cost Per Unit = 90**

Total Fixed Cost to be recovered

=75000+35000

**Total Fixed Cost = 110000**

Calculation of Break Even Sales can be done using below formula as,

=110000/(100-90)

**Break Even Sales will be –**

**Break Even Sales = 11,000 units**

Therefore, the total minimum sales required next year will be 11,000 x 100 which is 11,00,000

### Relevance and Use

There are several ways to use this important concept in the field of finance. Production executives and managers have to be aware of their sales levels and how far or close they are to recover the variable and fixed cost every time. That’s the key reason that these managers keep trying constantly to alter those key elements in the formulas so as to reduce or increase the number of units to produce as per the situation and accordingly maintained the profitability of the firm. Further, it should also be noted that firms can avoid non-cash fixed costs like depreciation to calculate advance cash break-even sales.

### Recommended Articles

This has been a guide to Break Even Sales Formula. Here we discuss the calculation of break-even point sales along with practical examples and downloadable excel template. You can learn more about financing from the following articles –

- Calculate Marginal Product of Labor
- Examples of Fixed Cost
- Variable Costing Meaning
- Formula of Cost of Sales
- Formula of Total Variable Cost

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