Break-even Analysis

Break-even analysis is a financial calculation used to determine the point at which a business's revenues exactly equal its costs, meaning it neither makes a profit nor incurs a loss. The break-even point is calculated by dividing the fixed costs by the difference between the selling price per unit and the variable cost per unit (contribution margin). This analysis helps businesses understand the minimum level of sales required to cover their costs and is essential for pricing, financial planning, and decision-making.

Example

A company with fixed costs of $50,000, a selling price of $100 per unit, and variable costs of $60 per unit would have a break-even point of 1,250 units ($50,000 / ($100 - $60)).