A Break-even point refers to the number of products a company must sell to cover its production cost. It can also be expressed as the amount of sales the company must make in order for it to equal production expenditures. The formula used to calculate it is as follows: total fixed costs divided by price per product minus variable cost per product.
For example…
Let’s say the company Talking Eyewear invent reading glasses that will actually say out loud the words you’re reading. They cost a cool $1000 a pair. The fixed cost for making each pair is about $200 whereas the variable costs are $500 per pair. If the total company fixed costs are $300,000, to break even, the company must sell 600 units. To work this out, the formula total company fixed costs divided by price per product minus variable cost per product is used. In terms of sales amount, they must sell $600,000 worth of glasses. To work this out, the formula, running costs divided by 1 minus Unit’s variable cost divided by unit price is used.
