biz-breakeven

Break-Even Analysis

Overview

Break-even analysis finds the point where total revenue equals total costs — zero profit, zero loss. It separates costs into fixed and variable, then calculates the volume (units or revenue) needed to cover fixed costs through contribution margin.

Framework

IRON LAW: Fixed vs Variable Classification Must Be Rigorous

Fixed costs do NOT change with volume (rent, salaries, insurance).
Variable costs change PROPORTIONALLY with volume (materials, shipping per unit, commissions).

"Salaries" is NOT always fixed — a sales commission is variable.
"Rent" is NOT always fixed — a percentage-rent lease is variable.
Misclassification directly corrupts the break-even calculation.

Core Formulas

Contribution Margin per Unit = Selling Price - Variable Cost per Unit
Break-Even Units = Fixed Costs / Contribution Margin per Unit
Break-Even Revenue = Fixed Costs / Contribution Margin Ratio
Contribution Margin Ratio = Contribution Margin per Unit / Selling Price
Margin of Safety = (Actual Sales - Break-Even Sales) / Actual Sales
Degree of Operating Leverage (DOL) = Contribution Margin / Net Income

Step 1: Classify All Costs

Separate every cost line into fixed or variable. For semi-variable costs (e.g., electricity with a base charge + usage), split into fixed and variable portions.

Step 2: Calculate Break-Even Point

• Single product: BEP units = Fixed Costs / CM per unit
• Multiple products: Use weighted-average CM based on product mix, then BEP = Fixed / Weighted CM

Step 3: Assess Margin of Safety

How far above break-even are current sales? Higher margin of safety = more resilience to downturns.

Step 4: Scenario Analysis

Test: What happens if price drops 10%? If volume drops 20%? If fixed costs increase? Build a scenario table.

Output Format

# Break-Even Analysis: {Product/Business}

## Cost Structure
| Category | Amount | Fixed/Variable |
|----------|--------|---------------|
| {item} | ${X} | F/V |

## Break-Even Calculation
- Fixed Costs: ${X}/period
- Variable Cost per Unit: ${X}
- Selling Price per Unit: ${X}
- Contribution Margin: ${X} ({X%})
- **Break-Even: {N} units / ${X} revenue**
- Margin of Safety: {X%}

## Scenario Analysis
| Scenario | BEP Units | Margin of Safety |
|----------|-----------|-----------------|
| Base case | {N} | {X%} |
| Price -10% | {N} | {X%} |
| Volume -20% | N/A | {X%} |
| Fixed costs +15% | {N} | {X%} |