In business, a company's break-even point occurs when its total revenue equals its total costs.
Step 1: Identify the fixed cost Identify the fixed cost to produce the first unit of a product. For example, if the start-up cost is $20 to rent space for the first month of business, the fixed cost is $20.
Step 2: Identify the selling point Identify the selling point. If the manufacturer plans to sell each product for $1, the selling point is $1.
TIP: Sales can be usually be increased by lowering the selling point, but that raises the break-even point.
Step 3: Identify the variable unit cost Identify the variable unit cost. If it costs the manufacturer $0.57 to make each product, the variable unit cost is $0.57.
Step 4: Calculate the break-even point Calculate the break-even point using the formula: Break-Even Point equals Fixed Cost divided by the Unit Price minus the Variable Unit Cost.
FACT: Marketing managers use break-even points to evaluate profit potential and risks associated with marketing strategies.