Business · Quick Answer
What is break-even analysis?
Break-even analysis finds the sales volume at which total revenue equals total costs, the point where a business starts making a profit. Break-even units = Fixed Costs / (Price − Variable Cost per unit).
The formula
Break-even units = Fixed Costs / (Price per unit − Variable Cost per unit)
The denominator is called the contribution margin, the dollars each unit contributes toward covering fixed costs.
Example: Coffee cart
- Monthly fixed costs (rent, permit, insurance): $2,400
- Price per cup: $5.00
- Variable cost per cup (beans, milk, cup, lid): $1.20
- Contribution margin: $5.00 − $1.20 = $3.80
- Break-even: $2,400 / $3.80 = 632 cups/month (~21 cups/day)
Break-even in dollars
Break-even revenue = Fixed Costs / Contribution Margin Ratio
Where Contribution Margin Ratio = (Price − Variable Cost) / Price.
For the coffee cart: 3.80 / 5.00 = 76% CMR → Break-even revenue = 2,400 / 0.76 = $3,158/month
Why it matters
Break-even analysis answers critical business questions:
- How many sales do I need to cover costs?
- What happens if I raise prices by 10%?
- How does adding a $500/month expense change my required volume?
- At what volume do I need variable costs to drop to stay profitable?
Limitations
- Assumes a single product or a consistent sales mix
- Treats fixed costs as truly fixed (but rent steps up, labor scales, etc.)
- Doesn't account for cash-flow timing
- Ignores seasonality
Use break-even as a floor, not a target. Businesses typically plan for 2-3x break-even volume to survive downturns and invest in growth.