# Break-Even Analysis

## What is a 'Break-Even Analysis'

A break-even analysis is 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.

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## BREAKING DOWN '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.

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