Break-Even Analysis
Break-even point is where total revenue equals total costs - no profit, no loss. It's calculated as Fixed Costs / (Selling Price - Variable Cost per Unit). With $50,000 fixed costs, $50 selling price, and $20 variable costs, you break even at 1,667 units ($83,333 revenue). Understanding break-even is crucial for pricing decisions, financial planning, and assessing business viability.
Contribution margin (selling price minus variable cost) represents how much each unit contributes toward covering fixed costs and generating profit. After breaking even, each additional unit sold generates profit equal to the contribution margin. This is why businesses focus on volume after covering fixed costs - marginal profit accelerates.
Break-even analysis guides key decisions: pricing strategies (higher prices lower break-even point but may reduce demand), cost reduction initiatives (lowering fixed or variable costs reduces break-even), and expansion decisions (can we reach break-even volume in new markets?). It's also essential for startups - investors want to know when you'll break even and require how much capital until then.
Quick Tips
- Always compare APR, not just interest rates
- Use the Rule of 72 to estimate doubling time
- Extra payments dramatically reduce total interest
Frequently Asked Questions
Lower is better - means you reach profitability faster with fewer sales. Compare to realistic sales projections. If break-even is 10,000 units but you can only sell 5,000, your business model needs adjustment.
Reduce fixed costs (lower rent, streamline operations), reduce variable costs (negotiate with suppliers, improve efficiency), or increase prices (if market permits). Lowering break-even increases margin of safety and reduces risk.
Break-even is when revenue equals costs (zero profit). Profitability is revenue exceeding costs (positive profit). Break-even is a milestone; profitability is the goal. Calculate target profit by adding desired profit to fixed costs in the formula.