Break-Even Analysis

Break-even analysis is the calculation of the point in which a business “breaks even,” otherwise known as the moment that a business’ revenue starts to cover all of its expenses and make revenue.

Here’s how to use it in a sentence:

“According to Mark’s break-even analysis, he needs to price his pizzas at $6 per slice if he wants to make his pizza place profitable within six months.”

When a business breaks even, it has finally reached the point where its revenues are starting to equal or exceed its expenses. To compute for this, a business owner would need to identify and list down the fixed and variable costs that are involved in running the establishment. For example, the variable expenses for a pizza place would involve the price of the pizza ingredients (such as yeast, flour, tomatoes, pepperoni, and cheese) and its fixed expenses would be the costs of rent, labor, insurance, advertising, and utilities. The latter are costs that do not change with sales volume and are also known as overhead costs.

The breakeven point formula is calculated as: Fixed Expenses / (Unit Selling Price – Variable Expenses).