Glossary · UK
What is Break-Even Analysis?
A calculation that identifies the sales volume at which total revenue exactly equals total costs, helping businesses determine the minimum output needed to avoid a loss.
Full Definition
Break-even analysis divides costs into fixed costs (rent, salaries, insurance -- costs that do not change with output) and variable costs (materials, direct labour, packaging -- costs that rise with each unit produced). The break-even point in units is calculated as: Fixed Costs divided by (Selling Price per Unit minus Variable Cost per Unit). The bottom figure in this formula is the contribution margin -- what each unit sale contributes toward covering fixed costs. For example, a sole trader with £24,000 annual fixed costs selling a product at £60 with variable costs of £20 has a contribution margin of £40, meaning they must sell 600 units per year to break even. Break-even analysis is particularly valuable for self-employed individuals and startups assessing whether a business idea is viable. It also feeds into cash-flow forecasting and helps set pricing strategy. Keep in mind that break-even measures accounting costs and profit -- it does not account for the owner's drawings or opportunity cost of their time, so a sole trader should include a notional salary in fixed costs to make the analysis realistic.