What is Break-Even Analysis?
Break-even analysis determines the point at which total costs and total revenue are equal. At this point, there is no net profit or loss - the business "breaks even".
Key Terms
- Fixed Costs: Costs that don't change with production volume (rent, salaries, insurance, equipment leases)
- Variable Costs: Costs that vary with production (materials, direct labour, packaging, shipping)
- Contribution Margin: Selling price minus variable cost - the amount each sale contributes to covering fixed costs
- Contribution Margin Ratio: Contribution margin as a percentage of selling price
Break-Even Formulas
Break-Even Units = Fixed Costs ÷ Contribution Margin per Unit
Break-Even Revenue = Fixed Costs ÷ Contribution Margin Ratio
Contribution Margin = Selling Price - Variable Cost per Unit
Uses of Break-Even Analysis
- Determine the minimum sales needed to avoid losses
- Set pricing strategies
- Evaluate the impact of cost changes
- Make investment and expansion decisions
- Assess the viability of new products or services