The term "break-even analysis" refers to the point at which a company's total cost and total revenue are equal. The number of units or dollars of revenue required to cover all costs is determined using a break-even point analysis (fixed and variable costs).
The formula for Break-Even Analysis
The formula for break-even analysis is as follows: (In terms of quantity)
Break-even quantity = Fixed costs / (Sales price per unit – Variable cost per unit)
Where:
Fixed costs are costs that do not change with varying output (e.g., salary, rent, building machinery).
Sales price per unit is the selling price (unit selling price) per unit.
Variable cost per unit is the variable costs incurred to create a unit.
It is also helpful to note that sales price per unit minus variable cost per unit is the contribution margin per unit. For example, if a book’s selling price is INR 100 and its variable costs are INR 20 to make the book, INR 80 is the contribution margin per unit and contributes to offset the fixed costs.
The formula for break-even analysis is as follows: (In terms of Sales)
Break-even sales = Fixed costs /[ (Sales – Variable costs)/Sales]
Where:
Fixed costs are costs that do not change with varying output (e.g., salary, rent, building machinery).
Sales here is the total sales value
Variable cost is the total variable cost incurred
