Breakeven Point: Definition, Examples, and How to Calculate

What Is the Breakeven Point (BEP)?

In corporate accounting, the breakeven point (BEP) is the moment a company's operations stop being unprofitable and starts to earn a profit. The breakeven point is the production level at which total revenues for a product equal total expenses. The breakeven point can also be used in other ways across finance such as in trading.

Understanding Breakeven Points

A breakeven point can be applied to a wide variety of contexts. For instance, the breakeven point in a property would be how much money the homeowner would need to generate from a sale to exactly offset the net purchase price, inclusive of closing costs, taxes, fees, insurance, and interest paid on the mortgage—as well as costs related to maintenance and home improvements. At that breakeven price, the homeowner would exactly break even, neither making nor losing any money.

Traders also apply BEPs to trades, figuring out what price a security must reach to exactly cover all costs associated with a trade, including taxes, commissions, management fees, and so on. A company’s breakeven point is likewise calculated by taking fixed costs and dividing that figure by the gross profit margin percentage.

Business Breakeven Points

The breakeven formula for a business provides a dollar figure that is needed to break even. This can be converted into units by calculating the contribution margin (unit sale price less variable costs). Dividing the fixed costs by the contribution margin will reveal how many units are needed to break even.

$\begin{aligned} &\text{Business Breakeven} = \frac { \text{Fixed Costs} }{ \text{Gross Profit Margin} } \\ \end{aligned}$​Business Breakeven=Gross Profit MarginFixed Costs​​

Assume a company has $1 million in fixed costs and a gross margin of 37%. Its breakeven point is $2.7 million ($1 million ÷ 0.37). In this breakeven point example, the company must generate $2.7 million in revenue to cover its fixed and variable costs. If it generates more sales, the company will have a profit. If it generates fewer sales, there will be a loss.

It is also possible to calculate how many units need to be sold to cover the fixed costs, which will result in the company breaking even. To do this, calculate the contribution margin, which is the sale price of the product less variable costs. We'll look at that calculation next.

Breakeven Point and Contribution Margin

The breakeven point is heavily related to a company's contribution margin. The contribution margin is the amount a product's selling price exceeds its variable cost. It's calculated as:

Contribution Margin per Unit = Selling Price per Unit - Variable Cost per Unit

This margin indicates how much of each unit's sales revenue contributes to covering fixed costs and generating profit once fixed costs are met. For example, if a product sells for $10 but only incurs $3 of variable costs per unit, the product has a contribution margin of $7. Note that a product's contribution margin may change (i.e. it may become more or less efficient to manufacture additional goods).

The relationship between contribution margin and breakeven point is that even a dollar of contribution margin chips away at a company's fixed cost. A higher contribution reduces the number of units needed to break even because each unit contributes more towards covering fixed costs. Conversely, a lower contribution margin increases the breakeven point, requiring more units to be sold to cover fixed costs.

Let's look at one more example. In the example above, our contribution margin per unit was $7. Assume a company has $70,000 of fixed costs. The company must sell 10,000 units to break even. If the company can increase its contribution margin per unit to $8 (by perhaps lowering its per unit variable cost), it only needs to sell 8,750 ($70,000 / $8) to break even.

Benefits of a Breakeven Analysis

A breakeven analysis can help with many things, including:

• Finding Missing Expenses: A break-even analysis can help uncover expenses that you otherwise might not have seen coming. Your financial commitments will be determined at the end of a breakeven analysis, so there won’t be any surprises down the line.
• Limiting Decisions Based on Emotions: Making business decisions based on emotions is rarely a good idea, but it can be hard to avoid. A break-even analysis leaves you with hard facts, which is a better viewpoint from which to make business decisions.
• Setting Goals: You will know exactly what kind of goals need to be met to make a profit after a breakeven analysis. This helps you set goals and work toward them.
• Securing Funding: Often, you will need to use a break-even analysis to secure funding and show investors the plan for your business.
• Pricing Appropriately. A break-even analysis will show you how to properly price your products from a business standpoint.

Limitations of Breakeven Point

While the breakeven point is a valuable tool for decision-making, it has several limitations. One major downside is its reliance on the assumption that costs can be neatly divided into fixed and variable categories. In reality, some costs may not fit cleanly into these categories. For example, semi-variable costs, which have both fixed and variable components, can complicate the accuracy of the breakeven calculation which then changes the breakeven point in units.

Another limitation is that the breakeven point assumes that sales prices, variable costs per unit, and total fixed costs remain constant, which is often not the case. The price of goods sold at fluctuates, and the cost of raw materials may hardly stay stable. In addition, changes to the relevant range may change, meaning fixed costs can even change. This makes it almost impossible to always have a most up-to-date, accurate breakeven point.

Finally, the breakeven analysis often ignores qualitative factors such as market competition, customer satisfaction, and product quality. While the breakeven point focuses on financial metrics, successful business decisions also require a holistic view that looks outside the number. For example, it may just not be feasible to sell 10,000 units given the current market for the example above.

Stock Market Breakeven Points

Assume an investor buys Microsoft stock (MSFT) at $110. That is now their breakeven point on the trade. If the price moves above $110, the investor is making money. If the stock drops below $110, they are losing money. If the price stays right at $110, they are at the BEP because they are not making or losing anything. Options can help investors who are holding a losing stock position using the option repair strategy.

Call Option Breakeven Point Example

For options trading, the breakeven point is the market price that an underlying asset must reach for an option buyer to avoid a loss if they exercise the option. For a call buyer, the breakeven point is reached when the underlying asset is equal to the strike price plus the premium paid, while the BEP for a put position is reached when the underlying asset is equal to the strike price minus the premium paid. The breakeven point doesn’t typically factor in commission costs, although these fees could be included if desired.

Assume that an investor pays a $5 premium for an Apple stock (AAPL) call option with a $170 strike price. This means that the investor has the right to buy 100 shares of Apple at $170 per share at any time before the options expire. The breakeven point for the call option is the $170 strike price plus the $5 call premium, or $175. If the stock is trading below this, then the benefit of the option has not exceeded its cost.

If the stock is trading at $190 per share, the call owner buys Apple at $170 and sells the securities at the $190 market price. The profit is $190 minus the $175 breakeven price, or $15 per share.

Put Option Breakeven Point Example

Assume an investor pays a $4 premium for a Meta (formerly Facebook) put option with a $180 strike price. That allows the put buyer to sell 100 shares of Meta stock (META) at $180 per share until the option’s expiration date. The put position’s breakeven price is $180 minus the $4 premium, or $176. If the stock is trading above that price, then the benefit of the option has not exceeded its cost.

If the stock is trading at a market price of $170, for example, the trader has a profit of $6 (breakeven of $176 minus the current market price of $170). 

The Bottom Line

A breakeven point tells you what price level, yield, profit, or other metric must be achieved not to lose any money—or to make back an initial investment on a trade or project. Thus, if a project costs $1 million to undertake, it would need to generate $1 million in net profits before it breaks even.

Calculating breakeven points can be used when talking about a business or with traders in the market when they consider recouping losses or some initial outlay. Options traders also use the technique to figure out what price level the underlying price must be for a trade so that it expires in the money. A breakeven point calculation is often done by also including the costs of any fees, commissions, taxes, and in some cases, the effects of inflation.