For product managers, understanding the concept of break-even point for a product’s or a feature’s profitability is very important. It’s a point where a company’s revenues equal to its costs. It gives you a clear picture of the number of units to be sold or the total sales to target.
The break-even point will help the company to know when a particular product will start making a profit. If the revenue is below the break-even point, then the company is losing money. If it’s above, then it’s making money from the product or the feature.
Let’s take an example. Mathew owns kids toy manufacturing business. He is planning to introduce a new toy called “Robo Rover”, a remote-controlled robot. He wants to know if it impacts the company’s finances and how many toys he needs to sell to make a profit. So, he decides to calculate the break-even point.
First, he estimates the cost of the product in terms of the fixed and variable cost:
Fixed Costs = $1,000 (cost of material, equipment etc) per month
Variable Costs = 2.50 per toy produced (labor cost, utility, etc.) per month
Formula to calculate Break-Even Point:
BEP = Fixed Costs / (Sales price per unit – Variable costs per unit)
If Mathew decides to sell the new Robo Rover for \$10 per toy, then the number of units he must sell to reach the break-even point is:
BEP = $1000/($10 – $2.50)
BEP = 134 units (rounded up)
This means Mathew needs to sell at least 134 toys per month to reach the break-even point.