Break-Even is when the total revenue generated is equal to the total cost. To any company, meeting the break-even point is significant as it means that they’ve generated enough revenue to cover the total costs. With the advent of digitalization, Excel has become the go-to program for most professionals to keep tabs on their finances.
With its tools and features, Excel has made Break-Even analysis all that simple for its users. This article will go through how you can calculate the Break-Even Analysis in Excel with examples, so keep reading!
What is Break-Even Analysis?
Break-Even Analysis examines the cost borne and revenue generated by a company. While manufacturing a product, a company invests a certain amount. This is considered to be the cost of making the product. In Break-Even analysis, Total Cost is the sum of fixed cost, miscellaneous cost, and the product of variable cost and unit of product sold.
i.e., Total Cost= Fixed Cost + Miscellaneous Cost + Variable Cost * Unit of Product Sold
After the company starts selling the product, the Sales Value is determined by the product of units sold and the selling price of the item per unit.
i.e., Sales Value= Selling Price of Item * Units Sold
The company needs to make more revenue than the total cost to make a profit. In Break-Even Analysis, you must calculate the Contribution Margin before calculating the Break-Even point. The contribution Margin is calculated to view how much more revenue is generated than the total cost of manufacturing the product. To calculate the margin, you must subtract the Sales Value from the Total Cost born.
i.e., Contribution Margin=Total Cost- Sales Value
The point where you sell enough units to return your investment is called Break-Even Point (BEP). Anything made after the Break-Even Point is a profit, so it is understandable why getting to this is crucial for all companies. To calculate the BEP, you must divide Fixed Cost by the Contribution Margin.
i.e., BEP= Fixed Cost/Contribution Margin
How to Calculate Break-Even Analysis in Excel?
You can use formulas to calculate the Break-Even Point in Excel. To start the analysis, you need to have data for three items, including the total number of units sold, the selling cost per unit, and the fixed cost borne by the company.
Similarly, using Excel, you could calculate the total number of units you’ll have to sell to meet the Break-Even point. This will help create a target for your company in terms of sales.
In this section, we have mentioned the steps to calculate the Break-Even Point and calculate the target units to sell, all using the Excel program.
The first step in Break-Even analysis is to calculate the Break-Even Point. To help you understand the concept better, we have an example you can refer to.
Yasha runs a candle business. She bears $4 per unit candle and has a fixed cost of $5,000. She aims to sell each candle for $15. Now, we will calculate how many units she needs to sell to meet the Break-Even point:
Step 1: Calculate Total Cost
The first step is to calculate the Total Cost borne by Yasha in creating her candles. To calculate the Total Cost, enter the formula in the following format:
Total Cost = Total Fixed Cost + (Variable Unit Cost * Units Sold)
Step 2: Calculate Revenue
After calculating the total cost of manufacturing the product, you need to determine the Revenue generated. To calculate the Sales Value, enter the formula in the following format:
Revenue = Units Sold * Selling Price per unit
Step 3: Calculate Contribution Margin
Now, you need to subtract the total revenue generated from the total cost of making the product to calculate the contribution margin. Use the formula to calculate the contribution margin in this format:
Contribution Margin = Selling Price – Variable Cost
Step 4: Calculate Break-Even Point (BEP)
After you calculate the above-mentioned items, you can finally go ahead to calculate the Break-Even Point of your product. Enter the formula in the following format:
Break-Even Point (BEP) = Fixed Cost / Contribution Margin
After calculating the Break-Even Point of her candles, Yasha can come back to the spreadsheet every time she sells a candle to update the value of the Unit Sold. As Excel is dynamic, it will automatically update the value of the Unit Sold in its used formulas. Yasha will have to sell enough candles until the Break-Even Point reaches 0 to make a profit finally.
Use the Go Seek Tool
While selling a product, it would be of great help if you could know the exact number of products you will need to cover your investment.
Excel has a special feature, What-if analysis, that makes this process even easier. Instead of manually calculating the units you will need to sell to meet the Break-Even Point, you can use the Go Seek tool to do the job for you.
In this section, we will be using the same example we used above to calculate the target units to sell to meet the Break-Even Point in Excel.
- Open your spreadsheet.
- Go to the Data tab from the menu bar.
- Drop the menu down for What-If Analysis and select Goal Seek.
- In the Goal Seek window, Enter the following details:
- Set cell: Refer to the cell with your Break-Even point.
- To Value: Change the value to 0.
- By changing cell: Refer to the Units sold cell.
- Click OK.
How the Go Seek tool works is that it will take data from the cell with your Break-Even point and set it to 0 by changing the value of Units sold. As we’ve already established that when your company meets the Break-Even, the Break-Even Point will be zero. The updated value in the Unit Sold is the number of units you would need to sell to meet the Break-Even Point.
How to Represent Break-Even Analysis in a Chart?
You would want to represent your analysis in a chart or a diagram during presentations. You could use a line graph in Excel to represent your Break-Even point in a graph. For this purpose, you’ll first have to calculate the Net Profit and create an analysis for data with different units sold.
Step 1: Calculate Net Profit
You must enter the net profit to create your diagram. Net profit refers to the profit amount generated from units sold. Enter the formula in the following format to calculate the Net Profit:
Net Profit = Revenue – Total Variable Cost – Total Fixed Cost
Step 2: Fill Values
To create a chart, you need to calculate the Break-Even Analysis of multiple units sold values. You can use Flash Fill to create a new table with the analysis. Make use that the units you enter follow a pattern and aren’t irregular.
Step 3: Create a Chart
To create your chart, you will need the analysis’s total cost, revenue, and net profit values. Follow these steps to make the Break-Even Analysis chart:
- Open your worksheet with the data.
- Select the cells with the Total Cost, Revenue, and Net Profit.
- Head to Insert from the menu bar.
- Select Insert Line or Area Chart from the Charts section.
- Choose the first chart under 2D lines.
If you wish to format further the way your chart looks, head to Chart Designs from the menu bar and apply the formatting as you wish.