Breakeven Analysis

Definition: Calculation of when your income will match your expenses. This is usually done when you know your expenses are at different volumes of production but need to determine how much you need to sell to cover those expenses.

Example: You have a product with fixed costs of $100 and variable costs of $30 that sells for $50. If you sell 5, your total revenue is $250 (=$50X5) and your costs are $250 ($100 + $30X5). 5 units is the breakeven volume for your product

Why It’s Important: If you’re going to change your price or your costs change, it’s good to use the breakeven volume as “gut check” of whether you can hit or exceed that volume to maintain or increase profitability.

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