How to Calculate Break-even Points in QuickBook 2012

QuickBooks 2012 allows you to calculate product break-even points quickly and easily. A break-even point shows the sales revenue volume that produces zero profit and zero loss. Remember the formula for performing profit-volume-cost analysis? It goes like this:

profits = (sales revenue x gross margin percentage) – fixed costs

Rather than calculate profits based on the other three variables (sales revenue, gross margin percentage, and fixed costs), you can calculate a sales revenue amount based on the other three variables (profits, gross margin percentage, and fixed costs).

The formula for making such a break-even calculation, based on algebraic manipulation of the profit-volume-cost analysis formula, looks like this:

Break-even point (in sales revenue) = fixed costs ÷ gross margin percentage

The break-even point formula described in the preceding paragraphs estimates a break-even point in revenue. However, such a revenue-based break-even point often doesn’t make complete sense. For example, in the case of a boat-building business in which you sell boats for $100,000 each, there’s no practical way to get $266,667 of revenue.

You can’t sell two-thirds of a boat. The correct way to interpret a break-even point in revenue in this example, then, is to interpret it as a rough break-even point. As a practical matter in the boat-building business, the break-even point is slightly less than three boats per year.

If, in this example, you were working with boats that cost $1,000 each or $100 each, the precision of the break-even point would be much greater. For example, if you manufactured day sailor boats that were $1,000 apiece, you would know that the break-even point is somewhere between 266 and 267 boats (calculated by dividing the $266,667 of revenue by $1,000).

If the boats cost $100 each — perhaps they’re model boats — you know that the break-even point is between 2,666 model boats and 2,667 model boats (calculated by dividing the revenue amount by $100).

In either case, you see that the smaller the revenue per unit, the more precision you get in the break-even point in units.

You can also see from this example that the process of converting a break-even point in revenue to a break-even point in units is simply a matter of dividing the break-even point in revenue by the unit price.

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