Understanding the Breakeven Point: How Many Units to Sell?

The breakeven number of units, as the name suggests, is the number of units of goods or services that a company needs to sell in order to break even, or in other words, to suffer no financial losses but also make no profit.

Understanding the Breakeven Point

The breakeven number of units can be understood in a slightly different way by looking at and determining the breakeven point. The terms are essentially the same thing. However, the breakeven point and its calculation and analysis are what determines the number of units a company must sell in order to break even.

The basic purpose of a breakeven point calculation and analysis is to compare sales and revenueRevenueRevenue is the value of all sales of goods and services recognized by a company in a period. Revenue (also referred to as Sales or Income) to the costs associated with producing and selling goods or services. Breakeven point calculation determines the number of units that must be sold in order for the company to break even, with all fixed and variable costsFixed and Variable CostsCost is something that can be classified in several ways depending on its nature. One of the most popular methods is classification according being accounted for.

Formula for the Breakeven Point

The breakeven calculation is fairly simple:

The above formula gives a company the number of units of goods and services it must sell in order to return enough revenue to cover all of the costs associated with manufacturing, advertising5 P's of MarketingThe 5 P's of Marketing – Product, Price, Promotion, Place, and People – are key marketing elements used to position a business strategically. The 5 P's of, transporting, and selling the goods and services it offers to consumers.

Sample Calculation

Let’s look at an example to understand how using the breakeven point calculation reveals the breakeven number of units.

Assume that Company XYZ sells high-end sneakers. The information needed for the company to determine its breakeven number of units is as follows:

• Variable costs per unit
• Fixed costs
• Per unit sales price

The per unit variable costs are $100, the fixed costs are $350,000, and the sales price for each unit is $200. Let’s put the figures into the formula given above:

It means that Company XYZ needs to sell precisely 3,500 units of sneakers in order to generate enough revenue to exactly cover all of the costs associated with making and selling the sneakers. Any sales beyond the 3,500 level will begin to generate a profit for the company.

Key Takeaways

Every company is in business to make some type of profit. However, understanding the breakeven number of units is critical because it enables a company to determine the number of units it needs to sell to cover all of the expenses it’s accrued during the process of creating and selling their goods or services.

Once the breakeven number of units is determined, the company then knows what sales target it needs to set in order to generate profit and reach the company’s financial goals.

Additional Resources

CFI offers the Financial Modeling & Valuation Analyst (FMVA)®Become a Certified Financial Modeling & Valuation Analyst (FMVA)®CFI's Financial Modeling and Valuation Analyst (FMVA)® certification will help you gain the confidence you need in your finance career. Enroll today! certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following CFI resources will be helpful:

• Cost of Goods Manufactured (COGM)Cost of Goods Manufactured (COGM)Cost of Goods Manufactured (COGM) is a term used in managerial accounting that refers to a schedule or statement that shows the total
• Cost of Goods Sold (COGS)Cost of Goods Sold (COGS)Cost of Goods Sold (COGS) measures the “direct cost” incurred in the production of any goods or services. It includes material cost, direct
• Profit MarginProfit MarginIn accounting and finance, profit margin is a measure of a company's earnings relative to its revenue. The three main profit margin metrics
• Sales RevenueSales RevenueSales revenue is the income received by a company from its sales of goods or the provision of services. In accounting, the terms "sales" and