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Break-even
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Break-even is the point where a business stops making a loss and starts making a profit.
What break-even means
At break-even, total revenue = total costs, so profit is zero.
Below it, the business makes a loss. Above it, a profit.
Below it, the business makes a loss. Above it, a profit.
The formula
Break-even point (units) = fixed costs ÷ (sales price − variable cost per unit)
The bracket is the contribution per unit: how much each sale contributes towards paying fixed costs.
The bracket is the contribution per unit: how much each sale contributes towards paying fixed costs.
Break-even charts and margin of safety
On a chart, break-even is where the total revenue line crosses the total costs line.
Margin of safety = actual sales − break-even sales. It shows how far sales can fall before a loss.
Margin of safety = actual sales − break-even sales. It shows how far sales can fall before a loss.
Fixed costs are £1200. Each item sells for £5 and costs £2 to make. Find the break-even point.
- Contribution per unit = 5 − 2 = £3
- Break-even = 1200 ÷ 3
- = 400 units
Answer: 400 units
Break-even (units) = fixed costs ÷ (price − variable cost per unit). At break-even, revenue equals costs. Margin of safety = actual sales − break-even sales.
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