break-even analysis
The calculation of the point at which total revenue equals total costs — the minimum sales volume needed to avoid a loss.
Example
“With $100,000 in fixed costs and a $50 contribution margin per unit, the break-even point was 2,000 units.”
Memory Tip
BREAK-EVEN = where costs equal revenue. Above it = profit. Below it = loss.
Why It Matters
Understanding break-even analysis helps you determine whether a business venture or investment will be profitable before committing significant resources. It provides a clear financial target and helps you make informed decisions about pricing, production levels, and whether to proceed with a project at all.
Common Misconception
Many people assume that break-even is the goal they should aim for in business, when actually it is just the minimum threshold. Break-even means zero profit, so successful businesses need to generate sales well above this point to actually earn income and build wealth.
In Practice
A coffee shop owner calculates that fixed costs are 5,000 dollars per month and each cup of coffee has a variable cost of 1 dollar with a selling price of 5 dollars. The profit per cup is 4 dollars, so they need to sell 1,250 cups monthly to break even. If they sell 2,000 cups, they generate 3,000 dollars in profit above their break-even point.
Etymology
BREAK-EVEN (neither profit nor loss) ANALYSIS. Finding the point where you BREAK EVEN.
Common Misspellings
Small business accounting made simple
Related Terms
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See Also
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