Accounting & analysis
Break-even analysis
Break-even is the volume at which contribution exactly covers fixed costs and profit is zero.
Definition
Break-even analysis splits costs into fixed and variable, then finds the sales volume where total contribution equals total fixed costs. Below that volume the business makes a loss; above it, every extra unit adds profit.
It is a simplification: it assumes constant prices and a constant variable cost per unit. Its value is in showing how much margin of safety exists before a loss appears.
Intuition
Each unit sold carries a contribution that first pays the fixed bills. Break-even is the moment the bills are covered.
When to use it
- Setting a minimum sales target.
- Testing how a price or cost change moves the required volume.
When not to use it
- Multi-product businesses without a stable sales mix, or step-fixed costs that jump at capacity.
Formula
Break-even volume
Fixed costs ÷ (Price − Variable cost per unit)
Units required for zero profit.
Formula
Margin of safety
(Expected units − Break-even units) ÷ Expected units
How far sales can fall before a loss.
Worked example
A single-product break-even
Fixed costs 120,000; price 50; variable cost 30 per unit.
- 1
Contribution per unit
50 − 30 = 20.
- 2
Break-even volume
120,000 ÷ 20 = 6,000 units.
- 3
Break-even revenue
6,000 × 50 = 300,000.
The business must sell 6,000 units, worth 300,000 of revenue, to break even.
Common mistakes
- Subtracting fixed costs from the contribution margin ratio incorrectly.
- Forgetting that discounts lower contribution and raise the break-even volume.
- Ignoring capacity limits that make the calculated volume unreachable.
How it connects
is part of
The source is a component of the target idea.
- Cost-volume-profit: Break-even is the CVP model solved for zero profit.
relates to
Useful to study together, in either order.
is an advanced form of
The source extends the target once the basics are secure.