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Perform Break-Even Analysis in Excel is an important tool used to calculate the point at which a company’s total revenue is equal to its total costs. It is used to determine whether a proposed project or investment will generate a profit or loss. Break-even analysis is a great way to compare the profitability of different projects, and to estimate the financial risks associated with each one. By looking at the potential revenues and costs of a project, as well as the expected demand for a product or service, companies can make more informed decisions about which projects to pursue and which ones to avoid.
This analysis can be done in Excel, which is a powerful and user-friendly spreadsheet program. With Excel, users can easily enter the data related to their project, such as the cost of materials, labor, and overhead, as well as the expected sales volumes and revenue estimates. Once this data is entered, Excel can automatically calculate the break-even point for the project. This makes the process of performing a break-even analysis in Excel much faster and simpler than it would be without the use of a spreadsheet program.
An example of a break-even analysis in Excel can be seen in this article. In this example, a business is considering launching a new product line. The business enters the estimated costs of the project, including the cost of materials, labor, and overhead, as well as the expected sales volumes and revenue estimates. Excel then calculates the break-even point at which the total revenue is equal to the total costs. This allows the business to determine whether the proposed project is likely to generate a profit or loss.
A break-even analysis is a calculation that tells you the number of units a business must sell of some product in order to break even, i.e. make a profit of exactly zero dollars.
After this point, additional units sold will result in a positive profit.
To perform break-even analysis, you can use the following simple formula:
Break-Even Point = Fixed Cost / (Selling Price Per Unit – Cost Per Unit)
The following example shows how to use this formula to perform break-even analysis in Excel.
Example: How to Perform Break-Even Analysis in Excel
Suppose Ty plans on opening a cookie shop.
His fixed costs will include the equipment he needs to buy along with the ingredients for the cookies, which comes to a total of $1,000.
Each cookie will cost $1 to make and he plans to sell them for $5 each.
Suppose we would like to perform break-even analysis to determine how many cookies he must sell to break even.
To do so, we can enter his fixed costs, selling price per unit, and cost per unit in Excel.
We can then type the following formula into cell B5 to calculate the number of units he must sell to break even:
=B1/(B2-B3)
The following screenshot shows how to use this formula in practice:
In order to break even, i.e. achieve a profit of exactly zero dollars, he must sell 250 units.
If we’d like, we can also type the following formulas into the following cells to calculate the total revenue, total cost, and total profit Ty will earn by selling this many units:
- B6: =B5*B2
- B7: =B1+(B5*B3)
- B8: =B6-B7
The following screenshot shows how to use these formulas in practice:
We can see that his total revenue will be $1,250, total cost will be $1,250 and total profit will be $0.
Once we have all these formulas in place, we could also change the selling price per unit in cell B2 to see how various prices affect the number of units he must sell to break even.
For example, suppose we change the selling price per unit to $6:
We can see that the number of units he must sell in order to break even drops to 200.
This should make sense. The higher the selling price per unit, the greater the profit per cookie and the fewer number of cookies he must sell in order to break even.
Feel free to play around with the values in cells B1, B2 and B3 to see how changing different price changes the value for the break even point.