Definition: A breakeven analysis is used to determine how much sales volume your business needs to start making a profit.

The breakeven analysis is especially useful when you're developing a pricing strategy, either as part of a marketing plan or a business plan. To conduct a breakeven analysis, use this formula: Fixed Costs divided by (Revenue per unit - Variable costs per unit) Fixed costs are costs that must be paid whether or not any units are produced. These costs are "fixed" over a specified period of time or range of production. Variable costs are costs that vary directly with the number of products produced. For instance, the cost of the materials needed and the labour used to produce units isn't always the same. For example, suppose that your fixed costs for producing 100,000 widgets were $30,000 a year. Your variable costs are $2.20 materials, $4.00 labour, and $0.80 overhead, for a total of $7.00. If you choose a selling price of $12.00 for each widget, then: $30,000 divided by ($12.00 - 7.00) equals 6000 units. This is the number of widgets that have to be sold at a selling price of $12.00 before your business will start to make a profit. Common Misspellings: Breakeven analasys; breakeven analesis

Break-even analysis is used in cost accounting and capital budgeting to determine at what point a product or business is profitable. This analysis employs mathematical models, which may be very simple or highly complex, in order to understand the relations between the costs of doing business and the associated revenues. The object of break-even analysis is to learn or predict the minimum pricing and production levels at which a company will recover its costs and begin to profit. In addition to analyzing actual production levels, it may also be applied to production-related variables such as the break-even point for a given production capacity.

BASIC ANALYSIS
At its simplest, this analysis is used as its name suggests: to determine the volume of production at which a company's costs equal its revenues. Perhaps more useful than this simple determination, however, is the understanding gained through such analysis of the variable and fixed nature of certain costs. Break-even studies force the analyst to research, quantify, and categorize an entity's costs into fixed and variable groups. The general formula for break-even analysis is where BEQ = break-even quantity FC = fixed costs P = price per unit, and VC = variable costs per unit

EXAMPLE.
Assume a company sells Product X at $5.00 per unit. If its fixed costs, those necessary in order to produce any of Product X, are $100.00 and its variable costs per unit are $4.50, then its break-even quantity will be Thus, before it begins making a profit, the company must sell 200 units of Product X at the given price level.

Definition
A calculation of the approximate sales volume required to just cover costs, below which production would be unprofitable and above which it would be profitable. Break-even analysis focuses on the relationship between fixed cost, variable cost, and profit.