Break-Even Sales Formula

Break-Even Sales Formula (Table of Contents)

• Formula
• Examples
• Calculator

What is the Break-Even Sales Formula?

The term “break-even sales” refers to the sales value at which a company earns no profit no loss. In other words, the break-even sales are the dollar amount of revenue that precisely covers the fixed expenses and the variable expenses of a business. The formula for break-even sales can be derived by dividing the fixed costs of a company by its contribution margin percentage. Mathematically, it is represented as,

The contribution margin percentage can be computed by dividing the difference between the sales and the variable costs by the sales and expressed in terms of percentage. Mathematically it is represented as,

Contribution Margin Percentage = (Sales – Variable Costs) / Sales * 100%

Therefore, the formula for break-even sales can be combined as,

Examples of Break-Even Sales Formula (With Excel Template)

Let’s take an example to understand the calculation of Break-Even Sales in a better manner.

Break-Even Sales Formula – Example #1

Let us take the example of a company that is engaged in the business of lather shoe manufacturing. According to the cost accountant, last year the total variable costs incurred add up to be $1,300,000 on a sales revenue of $2,000,000. Calculate the break-even sales for the company if the fixed cost incurred during the year stood at $500,000.

Solution:

Break-Even Sales is calculated using the formula given below

Break-Even Sales = Fixed Costs * Sales / (Sales – Variable Costs)

• Break-Even Sales = $500,000 * $2,000,000 / ($2,000,000 – $1,300,000)
• Break-Even Sales = $1,428,571

Therefore, the company has to achieve minimum sales of $1.43 million in order to break even at current mix of fixed and variable costs.

Break-Even Sales Formula – Example #2

Let us take the example of another company ASD Ltd. engaged in pizza selling that generated sales of $5,000,000 during the year. The company incurred a raw material cost of $2,500,000 and a direct labor cost of $1,500,000. On the other hand, periodic costs such as depreciation, taxes and interest expenses stood at $100,000, $50,000 and $200,500 respectively. Calculate the break-even sales of ASD Ltd. based on the given information.

Solution:

Variable Cost is calculated using the formula given below

Variable Cost = Raw Material Cost + Direct Labor Cost

• Variable Cost = $2,500,000 + $1,500,000
• Variable Cost = $4,000,000

Fixed Costs is calculated using the formula given below

Fixed Costs = Depreciation + Taxes + Interest Expenses

• Fixed Costs = $100,000 + $50,000 + $200,500
• Fixed Costs = $350,500

Break-Even Sales is calculated using the formula given below

Break-Even Sales = Fixed Costs * Sales / (Sales – Variable Costs)

• Break-Even Sales = $350,500 * $5,000,000 / ($5,000,000 – $4,000,000)
• Break-Even Sales = $1,752,500

Therefore, to break even ASD Ltd. has to achieve minimum sales of $1.75 million.

Break-Even Sales Formula – Example #3

Let us take the example of Walmart’s annual report for the year 2018. According to the annual report, the following information is available, Calculate the break-even sales of Walmart Inc. for the year 2018.

Solution:

Fixed Costs is calculated using the formula given below

Fixed Costs = SG & A Expenses + Interest + Taxes

• Fixed Costs = $106.51 Bn + $2.18 Bn + $4.60 Bn
• Fixed Costs = $113.29 Bn

Break-Even Sales is calculated using the formula given below

Break-Even Sales = Fixed Costs * Sales / (Sales – Variable Costs)

• Break-Even Sales = $113.29 * $495.76 / ($495.76 – $373.40)
• Break-Even Sales = $459.01 Bn

Therefore, Walmart’s break even sales for the year 2018 is $459.01 billion.

Source Link: Wallmart.Inc Balance Sheet

Explanation

The formula for break-even sales can be derived by using the following steps:

Step 1: Firstly, determine the variable costs of production of the subject company. Typically, variable costs include those types of costs that directly vary with the change production level or sales volume. Examples of variable costs are the cost of raw material, fuel expense, direct labor cost, etc.

Step 2: Next, determine the fixed costs of production, which include those type of costs which are periodic in nature and as such do not change with the change in the level of production. Examples of fixed costs are management salaries, depreciation expense, interest expense, taxes, rental expense, etc.

Step 3: Next, determine the total sales of the company during a specific period of time, half-yearly or annually, etc.

Step 4: Next, calculate the contribution margin percentage by dividing the difference between the sales (step 3) and the variable costs (step 1) by the sales. It is expressed in terms of percentage.

Contribution Margin Percentage = (Sales – Variable Costs) / Sales * 100%

Step 5: Finally, the formula for break-even sales can be derived by dividing the fixed costs (step 2) of a company by the contribution margin percentage (step 4) as shown below,

Break-Even Sales = Fixed Costs / Contribution Margin Percentage

or

Break-Even Sales = Fixed Costs * Sales / (Sales – Variable Costs)

Relevance and Use of Break-Even Sales Formula

It is very important to understand the concept of break-even sales because it is predominantly used to ascertain the minimum sales required in order to achieve at least no profit no loss situation. It is usually used before the start of a new business or a new product line, so as to chalk out a clear plan and identify the key risks involved in achieving the desired profitability.

Break-Even Sales Formula Calculator

You can use the following Break-Even Sales Formula Calculator

1. Formula for Average Fixed Cost
2. How to calculate Contribution Margin
3. Example of Break Even Analysis Formula
4. Calculation of Variable Costing Example