# What is Break-Even Analysis? Before your business can realize “profit,” you must first understand the concept of breaking even. To break even on your company’s product lines and/or services, you must be able to calculate the sales volume needed to cover your costs and how to use this information to your advantage. You must also be familiar with how your costs react to changes in volume. Break-even analysis (cost-volume-profit analysis or CVP) allows you to answer many planning questions and help with decision-making.

Break-even analysis is the process of calculating the sales needed to cover your costs so that there is zero profit or loss. The break-even point that is arrived at by such analysis is important to the profit planning process. Such knowledge allows managers to maintain and improve operating results. It is also important when introducing a new product or service, modernizing facilities, starting a new business, or appraising production and administrative activities.

Break-even analysis can also be used as a screening device, such as the first attempt to determine the economic feasibility of an investment proposal. Also, pricing may be aided by knowing the break-even point for a product.

The guidelines for breaking even are:

• If there’s an increase in selling price, it lowers break-even sales
• If there’s an increase in variable cost, it increases break-even sales
• If there’s an increase in fixed cost, it increases break-even sales

### What is Break-Even Point?

A company’s break-even point is the point at which its revenues cover all of its costs. Basically, we can define the break-even point as the level of sales (either units or dollars) that causes profits (however measured) to equal zero. Most commonly, the break-even point as the unit sales required for earnings before interest and taxes (EBIT) to be equal to zero. This point is often referred to as the operating break-even point. In conclusion, the break-even point is an important metric that indicates how many units a company must sell, or the dollar value of revenues a company must generate, to cover all of its costs (both fixed and variable).

### How to Calculate the Break-Even Point in Unit or Dollar Value

A company’s break-even point in units is calculated as: (total fixed costs) / (contribution margin per unit). The breakeven points that are shown for each accounting period apply to each accounting period separately; they are not cumulative in nature. It also varies across accounting periods due to the fluctuation in fixed costs, variable costs, and revenues over each of the accounting periods. Below is an example calculation of the Breakeven Point in Units.

The calculation is as follows:

Where:
Q = Quarter;
VarCosts = Variable Costs;
VCperUnit = Variable Costs per Unit;
CMPU = Contribution Margin per Unit

Another way to calculate a company’s breakeven point is in terms of dollars of revenues. Calculating the breakeven point in dollars of revenues does not change the breakeven point; it simply offers another metric (in addition to breakeven in units) by which can be analyzed and assessed. A company’s breakeven point in dollars of revenues is equal to: (breakeven point in units) * (price per unit). The price per unit used in this case is the average selling price per unit over each accounting period. Below is an example calculation of the Breakeven Point in Dollar Value.

The calculation is as follows:

Where:
Q = Quarter;
FixCosts = Fixed Costs;
VarCosts = Variable Costs;
TotCosts = Total Costs;
VCperUnit = Variable Costs per Unit;
CMPU = Contribution Margin per Unit;
BpU = Break-even Point per Unit

You can also determine the break-even point by using a graphic table such as the following: