Break even analysis means determining the amount of product that must be sold for the company to have a net income of zero: no profit and no loss.
When a company breaks even, their revenue equals their costs. Let’s say I sell my shoes for $30 a pair. The cost of the leather and the cost of the shoe maker’s salary is $20 a pair. When I sell my shoes I take the $30 sales price and subtract $20 for the leather and salaries to get $10. I can use the $10 to contribute towards paying the rent and other fixed costs. $10 is the contribution margin. If my rent is $500, I will need to sell $500/10 or 50 pairs of shoes to pay the rent. At sales of 50 pairs a month I break even. If I sell more than 50 pairs of shoes that extra $10 a pair is profit.
Sign Up to Learn More!
Join our mailing list today to get notified of new discount offers, course updates, Roger CPA Review news, and more!