Break-Even Analysis

Concept

The Break-Even Point

Break-even is the level of sales at which total revenue equals total costs — no profit, no loss. It can be expressed in units or in dollars.

Example

Break-Even in Units

Fixed costs = $100,000. CM per unit = $20. Break-even units = $100,000 / $20 = 5,000 units. The company must sell 5,000 units just to cover all costs.

Example

Break-Even in Dollars

Using the CM ratio (40%): Break-even dollars = $100,000 / 0.40 = $250,000. Alternatively: 5,000 units × $50 selling price = $250,000.

Key Point

Target Profit

To find the volume needed for a target profit, add the target profit to fixed costs: Units = (Fixed Costs + Target Profit) / CM per unit.

Contribution Margin

Margin of Safety & Operating Leverage

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