Calculate the sales volume or revenue your business needs to cover its costs and identify the point where sales move from covering expenses to generating profit.
Break-even analysis shows the point at which total sales equal total costs. Below that point, the business is not covering all fixed and variable costs; above it, each additional unit or dollar of contribution can begin to support profit, assuming the inputs remain unchanged.
For a simple unit-based calculation, the break-even quantity is driven by fixed costs and the contribution earned on each sale, which is the selling price less the variable cost per unit. The result is useful for pricing, budgeting, capacity planning and testing how cost increases or price changes may affect the minimum sales target. It is a planning model, so real-world changes in product mix, discounts and overheads should also be considered.
Learn how fixed costs, variable costs and contribution margin shape your break-even point.
Break-even is the level of sales at which total revenue equals total costs. At that point, the business has covered the costs included in the calculation but has not yet generated profit from those sales.
Fixed costs are expenses that do not usually change directly with each unit sold over the period being analysed, such as base rent, some salaries, software subscriptions or insurance.
Variable costs change as sales or production changes. Examples can include direct materials, packaging, transaction fees, sales commissions or other costs that rise with each unit sold.
If variable cost stays the same, a higher selling price increases contribution per unit. More contribution from each sale means fewer units are required to cover the same fixed costs.
Yes. A service business can adapt the model by using a service unit such as billable hours, appointments or projects, provided fixed and variable costs are classified consistently.
SMH Accountants & Advisors can help test pricing, margins, overheads and sales assumptions against your actual business figures.
