Accounting Dictionary

Break-even analysis

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.

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