Break-Even Analysis
The number of units you must sell before a single dollar of profit appears — the line between red and black.
Break-Even Analysis
The number of units you must sell before a single dollar of profit appears — the line between red and black.
How the math works.
Break-even analysis identifies the sales volume at which total revenue equals total costs — the point where a business transitions from loss to profit. Below break-even, each unit sold reduces the loss; above it, each unit contributes pure profit.
The contribution margin (Price minus Variable Cost per unit) is the amount each sale contributes toward covering fixed costs. Once fixed costs are covered, the contribution margin becomes profit.
This analysis assumes linear cost behavior: each unit costs the same to produce and sells for the same price. In reality, bulk discounts, tiered pricing, and capacity constraints introduce non-linearities. Use break-even as a baseline, then model scenarios that reflect your actual cost structure.
The most common mistake is underestimating fixed costs. Include everything: rent, salaries, insurance, software subscriptions, loan payments, depreciation. If a cost would exist even with zero sales, it is fixed.