Break-Even Analysis

AAA

DEFINITION of 'Break-Even Analysis'

An analysis to determine the point at which revenue received equals the costs associated with receiving the revenue. Break-even analysis calculates what is known as a margin of safety, the amount that revenues exceed the break-even point. This is the amount that revenues can fall while still staying above the break-even point.

INVESTOPEDIA EXPLAINS 'Break-Even Analysis'

Break-even analysis is a supply-side analysis; that is, it only analyzes the costs of the sales. It does not analyze how demand may be affected at different price levels.

For example, if it costs $50 to produce a widget, and there are fixed costs of $1,000, the break-even point for selling the widgets would be:

If selling for $100: 20 Widgets (Calculated as 1000/(100-50)=20)

If selling for $200: 7 Widgets (Calculated as 1000/(200-50)=6.7)

In this example, if someone sells the product for a higher price, the break-even point will come faster. What the analysis does not show is that it may be easier to sell 20 widgets at $100 each than 7 widgets at $200 each. A demand-side analysis would give the seller that information.

VIDEO

Loading the player...
RELATED TERMS
  1. Zero-One Integer Programming

    An analytical method consisting of what amounts to a series of ...
  2. Breakeven Price

    1. The amount of money for which an asset must be sold to cover ...
  3. Incremental Analysis

    A decision-making technique used in business to determine the ...
  4. Fixed Cost

    A cost that does not change with an increase or decrease in the ...
  5. Revenue

    The amount of money that a company actually receives during a ...
  6. Profit Range

    A range of prices that an underlying security can possess in ...
RELATED FAQS
  1. How is break-even analysis affected by economies of scale?

    Break-even analysis is used to determine when revenue of a good sold equals the cost of the good sold. The break-even point ... Read Full Answer >>
  2. How can I calculate break-even analysis in Excel?

    Break-even analysis is used to determine when revenue of a good sold equals the cost of the good sold. It is the point at ... Read Full Answer >>
Related Articles
  1. Investing

    What's a Break-Even Analysis?

    Most businesses have fixed costs such as rent and salaries, as well as costs for raw materials. Break-even analysis shows how many sales it takes to pay off the costs of doing business, and “break ...
  2. Budgeting

    Will You Break Even On Your Home?

    Calculate how much your property will need to appreciate to cover the costs of owning it.
  3. Fundamental Analysis

    Measuring Company Efficiency

    Three useful indicators for measuring a retail company's efficiency are its inventory turnaround times, its receivables and its collection period.
  4. Markets

    Consumer Spending As A Market Indicator

    What people buy and where they shop can provide valuable information about the economy.
  5. Fundamental Analysis

    Analyzing Retail Stocks

    To analyze retail stocks, investors need to be aware of the most common metrics used. Find out what they are.
  6. Professionals

    Do You Belong In Retail?

    Making a career in retail is one of the most challenging tasks in the investment industry. Find out if it's for you.
  7. Economics

    Understanding Perpetuity

    Perpetuity means without end. In finance, a perpetuity is a flow of money that will be received on a regular basis without a specified ending date.
  8. Investing

    What Tech Companies Seeking Funding Must Overcome

    Tech companies face a unique set of challenges, including a need for timely responses to changes in technology and difficulty recruiting the right talent.
  9. Economics

    Vietnam -- New Asian Hot Spot For Tech Investment

    Vietnam now has a rapidly expanding tech sector that's attracting investors from around the globe due to low business costs and highly skilled workers.
  10. Fundamental Analysis

    What is a Null Hypothesis?

    In statistics, a null hypothesis is assumed true until proven otherwise.

You May Also Like

Hot Definitions
  1. Loan-To-Value Ratio - LTV Ratio

    A lending risk assessment ratio that financial institutions and others lenders examine before approving a mortgage.
  2. DuPont Analysis

    A method of performance measurement that was started by the DuPont Corporation in the 1920s. With this method, assets are ...
  3. Asset Class

    A group of securities that exhibit similar characteristics, behave similarly in the marketplace, and are subject to the same ...
  4. Fiat Money

    Currency that a government has declared to be legal tender, but is not backed by a physical commodity. The value of fiat ...
  5. Interest Rate Risk

    The risk that an investment's value will change due to a change in the absolute level of interest rates, in the spread between ...
  6. Income Effect

    In the context of economic theory, the income effect is the change in an individual's or economy's income and how that change ...
Trading Center