By Ben Hollister, CPA, CMA

Breakeven point of multiple product lines are the equilibrium point where total revenues equal total expenses for a business based on a particular mix of sales and product lines.  It is a dynamic number.  It never stays the same.

Do you know the break even point for your multiple product lines? 

The Breakeven Point is the level of output at which total revenues equal total expenses. This is the point where operating income is zero.

Lets assume you are selling multiple products.  What would be your new break even point be if individual product sales accounts for 30% & 70% of the total revenues, and variable costs are 30% and 40% of the total individual product revenues, respectively.  Total fixed costs are $63,000.

Revenues = Fixed Costs + Variable Costs

Revenues(R) = $63,000 + .30(.30R) + .70(.40R)
Revenues(R) = $63,000 + .09R + .28R
.63R=$63,000
R=$100,000 is amount of revenues required to breakeven for this example - so to "prove" this example:

                     Sales    Variable Costs Gross Profit
Product A     $30,000      $  9,000        $21,000
Product B     $70,000      $28,000        $42,000
Totals        $100,000      $37,000        $63,000
Fixed Costs                                        $63,000
Profit                                                  $    -  

Note that whenever a part of the breakeven "formula" changes the resulting breakeven point changes.  Here is a quick example of the 2 product calculation if the sales mix changed by 5% more sales to product A.

Revenues = Fixed Costs + Variable Costs

Revenues(R) = $63,000 + .35(.30R) + .65(.40R)
Revenues(R) = $63,000 + .105R + .26R
.635R=$63,000
R=$99,213 is amount of revenues required to breakeven for this example - so to "prove" this example:

                     Sales    Variable Costs Gross Profit
Product A     $34,725       $10,417          $24,307
Product B     $64,488       $25,795          $38,693
Totals         $99,213       $36,213          $63,000
Fixed Costs                                          $63,000
Profit                                                    $    -  

A 5% increase in sales of product A resulted in a 1% drop in the amount of total sales needed to breakeven.  Based on this scenario, a company should try to increase product A's portion of sales since it contributes more towards the bottom line to breakeven.

Note that whenever a part of the breakeven "formula" changes the resulting breakeven point changes.  What if the 2 product calculation's fixed costs also increased by $20,000.

Revenues = Fixed Costs + Variable Costs

Revenues(R) = $83,000 + .30(.30R) + .70(.40R)
Revenues(R) = $83,000 + .09R + .28R
.63R=$83,000
R=$131,746 is amount of revenues required to breakeven for this example - so to "prove" this example:

                    Sales    Variable Costs Gross Profit
Product A     $39,524      $11,857      $27,667
Product B     $92,222      $36,889      $55,333
Totals        $131,746      $48,746      $83,000
Fixed Costs                                      $83,000
Profit                                                $    -  

With a similar sales mix to the initial example above, a $20,000 increase in fixed costs require the company to increase its total sales by 32%.

The breakeven point examples above are multi-product scenarios.  These examples use a weighted average of total sales (not contribution margin per unit) to determine the breakeven mix.  (See segment 1 for breakeven calculations per unit.)  Breakeven point calculations can become very complex depending on the amount of information available.    However, it is very important to determine your breakeven point when adding a new product line or for monitoring an ongoing business. Upcoming segment of breakeven: Absorption Costing 

Breakeven Point-Segment 1 "The Basics"

By: Ben Hollister, CPA, CMA

Breakeven point is the equilibrium point where total revenues equal total expenses for a business based on a particular mix of sales.  It is a dynamic number.  It never stays the same.

Do you know the break even point of your company or product line? 

The Breakeven Point is calculated by taking your total fixed costsdivided by the gross profit per unit, net of all variable expenses.

Assume that you sold widgets for $2.00 a piece at a 30% gross profit with $6,000 of fixed costs:  Your breakeven point would be 10,000 units.

Unit Sales Price                     $2.00    x   10,000  = $20,000.00

Variable Cost per Unit            $1.40    x   10,000  = $14,000.00

Gross Profit per Unit               $0.60                          6,000.00

Total Fixed Costs             $6,000.00                        $6,000.00

Breakeven ($6,000/.60) = 10,000 units                     $    -   profit

Assume that you sold widgets for $2.00 a piece at a 30% gross profit and had a reduction of fixed costs by $1,000:  Your breakeven point would be 8,333 units.

Unit Sales Price                     $2.00    x    8,333  = $16,666.67

Variable Cost per Unit            $1.40    x    8,333  = $11,666.67

Gross Profit per Unit              $0.60                           5,000.00

Total Fixed Costs             $5,000.00                        $5,000.00

Breakeven ($5,000/.60) =  8,333 units  (17% Less)   $     -   profit

Just a $1,000 decrease in fixed costs, the company could sell 1,667 less units to breakeven.

Assume that you increased or decreased your sales price of widgets by 5% a piece at the same variable cost per unit of $1.40 and restored your fixed costs to the original $6,000:  Your breakeven point would be 8,571 or 12,000 units, respectively.

Unit Sales Price               $2.10    x    8,571  = $18,000.00      

Variable Cost per Unit      $1.40    x    8,571  = $12,000.00      

Gross Profit per Unit         $0.70                           6,000.00     

Total Fixed Costs       $6,000.00                         $6,000.00     

Breakeven ($6,000/.70) = 8,571 units (14% Less) $    -   profit

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Unit Sales Price               $1.90    x   12,000  = $22,800.00

Variable Cost per Unit      $1.40    x   12,000  = $16,800.00

Gross Profit per Unit        $0.50                           6,000.00

Total Fixed Costs      $6,000.00                         $6,000.00

Breakeven ($6,000/.50) = 12,000 units (20% More) $  -  profit

A 5% increase or decrease in sales price, the company could sell 1,429 less or must sell 2,000 more units to breakeven since their gross profit per unit increased by $.10 or decreased by .10, respectively.

Some things to think about: a company forecasts lower sales due to a declining market, a company needs to know its breakeven point to determine what alternatives it has to remain profitable: (1) Reduce its fixed costs or (2) Increase the sales price of the product or (3) Reduce variable costs.  Otherwise the company will have to operate at a loss during the decline. The examples above illustrate a couple of these alternatives.  A reduction in fixed costs of $1,000, a company could sell 17% less items to breakeven.  If the company was unable to reduce its fixed costs, but was able to manage a 5% increase in sales price, the company could sell 14% less items to breakeven or if they are forced to accept a 5% decrease in sales price, a company would have to sell 20% more just to breakeven.

The breakeven point examples above are simplified scenarios.  Breakeven point calculations can become very complex depending on the amount of different products available.  However, it is very important to determine your breakeven point when anything changes, such as adding a new product line, price changes, cost changes, in order to properly manage your business.  

Upcoming segment of breakeven: Multiple Product Lines.