Break-Even Point

Concept:

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.

Example:

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.