Break-even Analysis

With the aid of break-even analysis you can find the point which separates the profit zone from the deficit zone. This point is called break-even point. For the break-even analysis you need the revenue, variable costs, the profit margin, fixed costs and the profits. Now you can calculate:

  • profit margin = revenue - variable costs
  • Profit = profit margin - fixed costs

Now it is possible to draw a diagram:

                       
Figure 7: Break-even analysis: Graphically Determination of break-even point.

EXERCISE: You have variable costs of € 5 per product. The fixed costs are given as € 2.000. You sell your products at a price of € 8. Calculate the break-even point and profit, when selling 1,000 pieces of the product.