Break-even point (BEP)

A break-even point (BEP) is the point at which a company’s total revenue equals its total costs, meaning there is no profit or loss. Any sales beyond the BEP contribute to profit. 

This metric helps businesses understand how much revenue they must generate to cover their expenses before starting to earn a profit, which also helps assess the viability of their products or services.

The BEP is calculated by dividing the fixed costs by the contribution margin percentage of each sale.  

For example, a tour operator’s fixed costs are $50,000 per year (for staff salaries, licenses, technology, etc.) Each trip is sold for $100, and the variable cost per trip (transport, lunch, etc.) is $30. That means the contribution margin per sale is 100 – 30 = 70, and the percentage is 70 / 100 = 0.7. 

BEP = 50,000 / 0.7 = 71428.6. The tour operator has to earn $71,428.6 in sales to break even. At that point, they’ve covered all fixed and variable costs and begin making a profit.

BEP can also be calculated in units by dividing the fixed costs by the contribution margin. In our case, this would be 50,000 / 70 = 714.29. So the tour operator must sell approximately 715 trips to break even.