Break-even Analysis
A financial calculation determining the sales volume needed to cover all costs without profit or loss, helping businesses understand their minimum viable operating level.
Break-even Analysis
A financial calculation that determines the sales volume at which total revenue equals total costs, resulting in neither profit nor loss and helping businesses understand their minimum viable operating level.
For instance, a manufacturer with fixed costs of $300,000 and a contribution margin of $40 per unit (selling price of $100 minus variable costs of $60) would calculate a break-even point of 7,500 units ($300,000 ÷ $40) or $750,000 in sales revenue.
Break-even analysis uses the relationship between fixed costs, variable costs, and revenue to identify the point where a business covers all expenses. This information helps managers make decisions about pricing, cost structure, and required sales volumes. The formula can be expressed in units (fixed costs ÷ contribution margin per unit) or in dollars (fixed costs ÷ contribution margin ratio). Beyond identifying minimum viable sales, the analysis can be extended to determine volumes needed for target profit levels or evaluate the impact of changes in costs, prices, or product mix.