7.5 Break-even Analysis
The concept of break-even analysis is used a lot in business.
"If we take on new Product X, how many would we need to sell to break-even (ie. costs us nothing to do it)?"
"If we set up a new branch in Y, what sales $ would they need to make to break-even?"
The breakeven point is the minimum amount of sales (in dollars or units) that the business needs to cover all of the expenses. When it makes that level of sales, it will 'break-even' and have neither profit nor loss. After that point, each sale contributes directly to the net profit.
The calculations used for some of these analyses can be quite sophisticated, but they are all based on the same simple formula:
Sales amount to BE = fixed costs divided by the Contribution Margin.
Where:
The following image shows an example of the calculation using the Global Retail 2028 case study.
"If we take on new Product X, how many would we need to sell to break-even (ie. costs us nothing to do it)?"
"If we set up a new branch in Y, what sales $ would they need to make to break-even?"
The breakeven point is the minimum amount of sales (in dollars or units) that the business needs to cover all of the expenses. When it makes that level of sales, it will 'break-even' and have neither profit nor loss. After that point, each sale contributes directly to the net profit.
The calculations used for some of these analyses can be quite sophisticated, but they are all based on the same simple formula:
Sales amount to BE = fixed costs divided by the Contribution Margin.
Where:
- the Contribution Margin is sales less variable expenses (Cost Of Sales), and
- fixed costs are the non-variable costs.
The following image shows an example of the calculation using the Global Retail 2028 case study.
