What is Break-Even Analysis?
Break-even analysis determines the point at which total revenue equals total costs — the minimum number of units you must sell (or minimum revenue you must earn) before your business stops losing money and starts making a profit. Below the break-even point, you operate at a loss; above it, every additional unit sold generates pure profit.
Break-even analysis is fundamental to business planning, pricing strategy, and investment decisions. It helps entrepreneurs understand whether a business idea is financially viable, how pricing changes affect profitability, how many units must be sold each month to cover overhead, and how changes in fixed or variable costs affect the bottom line.
The two types of costs are: fixed costs (rent, salaries, insurance — costs that don't change with production volume) and variable costs (materials, per-unit labor, shipping — costs that scale directly with units sold). The difference between the selling price and variable cost per unit is the contribution margin — the amount each unit "contributes" toward covering fixed costs and ultimately generating profit.