## What is Break-Even Analysis?

**Break-Even Analysis** quantifies the total number of units that must be sold, or the minimum sales threshold, for revenue to equal total costs.

Practitioners conduct a break-even analysis to determine the break-even point (BEP)—the inflection point where total revenue offsets total costs—resulting in neither a profit nor the incurrence of a loss.

The incremental revenue generated past a company’s break-even point (BEP) converts into profit since total costs—comprised of fixed and variable costs—have been covered (i.e. net positive).

### Generate Key Takeaways

- Break-even analysis compares a company's fixed costs to the net profit earned per incremental unit produced and sold.
- Break-even analysis is a method to determine the number of units required to be sold or the dollar amount of revenue needed to be generated to reach the break-even point (BEP).
- The break-even point (BEP) is the inflection point at which total revenue is equal to total costs (i.e. the sum of fixed and variable costs).
- The break-even point (BEP) is calculated by dividing a company’s total fixed costs by the difference between the selling price per unit and the variable cost per unit.
- The practical use-case of performing a break-even analysis is to determine the necessary units that must be sold (or revenue threshold) that must be attained to start generating a profit.
- The higher the contribution margin, the lower the break-even point (BEP), and vice versa.

## How Does Break-Even Analysis Work?

By analyzing the implied baseline in [operating performance](/content/knowledge/ebitda/index.html), where [revenue](/content/knowledge/net-revenue/index.html) is equal to costs, businesses can apply those insights in their internal planning to guide their strategic decisions.

For instance, the management team of a company could set a minimum sales target for each quarter to ensure the [break-even point](/content/knowledge/break-even-point/index.html) ( [BEP](/content/knowledge/break-even-point/index.html)) is met.

The starting point is to determine the break-even point (BEP) and implement adjustments as deemed necessary to ensure the minimum threshold is met, or else it is only a matter of time before the business becomes [insolvent](/content/knowledge/insolvent-insolvency/index.html).

## How to Conduct Break-Even Analysis

In order to perform a break-even analysis, there are two pieces of information necessary:

- **Fixed Costs ➝** [Fixed costs](/content/knowledge/fixed-cost/index.html) refer to the expenses that do not fluctuate, irrespective of the production volume and revenue performance.
- **Variable Costs ➝** [Variable costs](/content/knowledge/variable-cost/index.html), on the other hand, are expenses that are directly tied to the level of production and sales generated in a given period.

The contribution margin represents the portion of a company’s revenue allocated to cover the incurred fixed costs:

**Contribution Margin =** Selling Price Per Unit **–** Variable Cost Per Unit

### Step-by-step Process to Conduct a Break-Even Analysis:

1. **Step 1 ➝** Quantify Cost Structure (Fixed Costs and Variable Costs)
2. **Step 2 ➝** Estimate the Contribution Margin
3. **Step 3 ➝** Calculate the Break-Even Point (Revenue = Costs)
4. **Step 4 ➝** Perform [Sensitivity Analysis](/content/knowledge/financial-modeling-techniques-sensitivity-what-if-analysis-2/index.html) (“What-If”)

## Break-Even Analysis Formula

The break-even point (BEP) is calculated by dividing the fixed costs by the contribution margin:

**Break-Even Point (Units) =** Fixed Costs **÷** (Selling Price per Unit **–** Variable Cost per Unit)

## How Does Contribution Margin Impact Break-Even Analysis?

The contribution margin impacts how quickly a company covers its fixed costs and generates a profit. Products with a higher contribution margin are more profitable as they cover fixed costs more quickly.

## Break-Even Analysis Calculator — Excel Template

### 1. Break-Even Analysis Calculation Example

Suppose we’re tasked with conducting a break-even analysis of a company with the following cost structure and unit economics:
- Fixed Costs = $2 million
- Variable Cost per Unit = $2.50
- Average Selling Price (ASP) = $6.50

### Calculation:
1. Contribution Margin = $6.50 — $2.50 = $4.00 
2. Break-Even Point (Units) = $2 million ÷ ($6.50 — $2.50) = 500,000
3. Break-Even Point (Dollars) = $2 million ÷ 61.5% = $3,250,000

## 2. Break-Even Point Sensitivity Analysis

In the next section, we’ll perform a sensitivity analysis to analyze the [net profit](/content/knowledge/net-income/index.html) of the company under different assumptions.”}

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