Definition:
Breakeven is the point where your revenue equals your variable and fixed expenses. Start-up companies and businesses use this quick and dirty method to calculate their breakeven point each month in order to understand what it will take to stay afloat.
Example:
Using the information above, the first step is to figure out your gross margin percentage (gross profit/revenue).
0.78 / 1.87 = 41.7%
Next, take your monthly fixed expenses (same thing as SG&A, operating expenses, etc.) and divide by the gross margin percentage.
15,500 / 41.7% = 37,170.26
This calculation shows us that you will need $37,170.26 in revenue to breakeven. If you divide the revenue number $37,170.26 by the price of the widget 1.87, this will tell you how many widgets you need to sell to breakeven.
37,170.26 / 1.87 = 19,877 widgets
From the HBR Blog:
“Marketers often have to make the call on whether a certain marketing investment is worth the cost. Can you justify the price tag of the ad you want to buy or the marketing campaign you’re hoping to launch next quarter? One of the most straightforward ways to answer this question is to perform a breakeven analysis, which will tell you how many incremental units you need to sell to make the money back that you put in.” From An HBR Refresher on Breakeven Quantity
