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

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. Breakeven Point - BEP

    1. In general, the point at which gains equal losses. 2. In ...
  6. Revenue

    The amount of money that a company actually receives during a ...
RELATED FAQS
  1. No results found.
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

    Higher Oil Prices On the Horizon? Maybe Not.

    Despite a decision by some oil companies to reduce the overall supply of oil, a sustained ascent in oil prices might not be on the immediate horizon.
  8. Entrepreneurship

    Gazelle Recycles Smart Phones For Green Profits

    Founded in 2006, Gazelle in one of several new companies that buy used, broken, or outdated mobile phones and other electronics from consumers.
  9. Economics

    Oil Prices' Impact On Oil Transport Sector

    Short-term changes in oil prices and in the volume of oil produced have a marginal impact on the oil transportation industry in Canada.
  10. Budgeting

    The Momentum, And Methods, Behind Walmart's Model

    Walmart's success stems from low costs, which are possible through specific supply and distribution strategies, and are passed to consumers as low prices.

You May Also Like

Hot Definitions
  1. Prepaid Expense

    A type of asset that arises on a balance sheet as a result of business making payments for goods and services to be received ...
  2. Gordon Growth Model

    A model for determining the intrinsic value of a stock, based on a future series of dividends that grow at a constant rate. ...
  3. Cost Accounting

    A type of accounting process that aims to capture a company's costs of production by assessing the input costs of each step ...
  4. Law Of Supply

    A microeconomic law stating that, all other factors being equal, as the price of a good or service increases, the quantity ...
  5. Investment Grade

    A rating that indicates that a municipal or corporate bond has a relatively low risk of default. Bond rating firms, such ...
  6. Fringe Benefits

    A collection of various benefits provided by an employer, which are exempt from taxation as long as certain conditions are ...
Trading Center