Break-even Analysis

Definition, Purpose and Formula:

To break–even means that total revenue matches total expenses; that is, the firm neither loses money nor makes a profit.

A Break Even Analysis determines the number of sales of a good or service required to cover the cost of production. 

It is important because it informs the business owner of the number of sales required to start making a profit.

Sales above the break-even point will result in profit. 

If the level of sales required to make a profit is well above forecasts, the business owner should not start the business.

It is calculated:

Quantity (Q) = Total Fixed Costs (FC) / Unit Price  - Variable Cost per unit