Definition
The break-even point is the sales volume at which total revenue exactly equals total costs, so the business makes neither a profit nor a loss. In units it equals fixed costs divided by the contribution margin per unit; in revenue it equals fixed costs divided by the contribution margin ratio. Every sale above it adds profit.
How it works
Break-even analysis rests on splitting costs into fixed and variable. Once you know how much each unit contributes after its variable costs, the question becomes simple: how many contributions do you need to pay for the fixed costs?
The same logic answers related questions. Add a target profit to fixed costs to find the volume that earns it. With several products, use a weighted average contribution margin based on the expected sales mix; the answer then holds only while the mix holds.
Break-even assumes constant prices and unit costs within a relevant range, and that production equals sales. Use the break-even calculator for a quick answer, or run cost-volume-profit analysis on your actual ledger in Ledgeriano, as described in the management accounting guide.
Formula
Break-even units = Fixed costs ÷ (Price - Variable cost per unit)
Break-even sales = Fixed costs ÷ CM ratio
Units for target profit = (Fixed costs + Target profit) ÷ Unit contribution
Example: a bakery
Fixed costs are 30,000 a month, a cake sells for 50 and its variable cost is 30. Unit contribution is 20, so break-even is 30,000 ÷ 20 = 1,500 cakes, or 75,000 in sales. To earn 10,000 the bakery needs (30,000 + 10,000) ÷ 20 = 2,000 cakes.