Break Even Analysis
Break even (B/E) analysis is a simple, but very effective financial feasibility test. B/E is used to find
the amount of sales necessary to pay all fixed costs (and have zero income.) In your business plan, it
represents a minimum acceptable performance. Follow these steps to calculate:
1) Determine Contribution Margin Percent. Contribution Margin (CM) equals Sales minus
Variable Expenses. CM% equals CM dollars divided by Sales. Note: The biggest variable
expense is usually Cost of Goods Sold (CGS), which is the direct material and labor necessary
to make a product or service ready for sale.
2) List and total all Fixed Expenses for a specific time period (usually one month.) Fixed
expenses do not rise or fall with sales volume. Examples: rent, insurance, utilities, etc.
3) Break Even Sales is Fixed Expenses divided by Contribution Margin %. (See Example)
Example:
Unit sales price: $10 Monthly Fixed Expenses:
Rent 2,000
less Cost of Goods Sold: Utilities 1,000
Material & Labor 3 Salary 3,000
less Other Variable Exp: Other 4,000
Commissions 1
Total Fixed Exp. $10,000
Unit Contribution Margin = $6
($10 – $3 – $1)
CM % ($6 ÷ $10) = 60%
B/E = Fixed Expense ÷ CM %
B/E = $10,000 ÷ .6
Monthly B/E Sales = $16,667