What is Break-Even Analysis?
Break-even analysis is a calculation that determines when total revenue equals total costs - the point where profit equals zero. The break-even formula is: Break-Even Units = Fixed Costs / (Price - Variable Cost). This tells you how many units you must sell to cover all costs. Break-even calculations are among the most common math problems in consulting case interviews.
| Formula | Fixed Costs / (Price - Variable Cost per Unit) |
| Also known as | Break-even point, BEP, cost-volume-profit analysis |
| Key component | Contribution margin (Price - Variable Cost) |
| Case interview frequency | Very high - appears in profitability, investment, and market entry cases |
| Answer type | Units to sell, time to payback, or revenue required |
| Difficulty | Formula is simple; fast mental math is the challenge |
Definition
Break-even is the point where a business neither makes nor loses money. Below break-even, the company operates at a loss because revenue doesn't cover all costs. Above break-even, every additional unit sold generates profit.
The concept is fundamental to business decisions: Should we launch this product? Is this investment worthwhile? Can this business model work? Break-even analysis provides a clear threshold for viability.
Understanding break-even requires distinguishing between fixed costs (which don't change with volume) and variable costs (which scale with each unit). This distinction is at the heart of the calculation.
The Break-Even Formula
Break-Even Units = Fixed Costs / (Price - Variable Cost)
Or: Break-Even Units = Fixed Costs / Contribution Margin
Fixed Costs
Costs that don't change regardless of how many units you sell. Examples: rent, salaries, equipment leases, insurance, administrative overhead. You pay these whether you sell 0 units or 1 million.
Variable Cost per Unit
Costs that increase with each unit produced. Examples: raw materials, packaging, direct labor, shipping, sales commissions. If you sell 10 units, variable costs are 10x the per-unit amount.
Contribution Margin
The difference between price and variable cost per unit (Price - Variable Cost). This is what each unit "contributes" toward covering fixed costs. After fixed costs are covered, the contribution margin becomes profit per unit.
Break-Even Calculation Example
Scenario: A company is launching a new product. Fixed costs are $500,000 per year (factory lease, salaries, marketing). Each unit sells for $50 and has variable costs of $30 (materials, packaging, shipping).
Calculation:
- Contribution margin = $50 - $30 = $20 per unit
- Break-even units = $500,000 / $20 = 25,000 units
Interpretation: The company must sell 25,000 units to cover all costs. At 25,001 units, they start making profit ($20 per unit above break-even). At 24,999 units, they lose money.
Break-Even Variations
| Variation | Formula | Use Case |
|---|---|---|
| Break-even units | Fixed Costs / Contribution Margin | Product launch decisions |
| Break-even revenue | Fixed Costs / Contribution Margin % | Service businesses, mixed products |
| Payback period | Investment / Annual Profit (or savings) | Investment evaluation |
| Target profit | (Fixed Costs + Target Profit) / Contribution Margin | "How many units for $X profit?" |
Break-Even in Case Interviews
Break-even analysis appears frequently in case interviews. Being fast and accurate with these calculations is essential.
New Product Launch
"Our client is launching a new product with $2M in fixed costs, $80 price, and $50 variable cost. How many units to break even?" Answer: 2,000,000 / 30 = 66,667 units.
Market Entry
"Opening a new store costs $500K. Annual profit is projected at $125K. What's the payback period?" Answer: 500,000 / 125,000 = 4 years.
Investment Decision
"The automation project costs $3M and saves $750K annually. When does it break even?" Answer: 3,000,000 / 750,000 = 4 years.
Pricing Analysis
"If we raise prices by $10, we'll lose 20% of volume. Does this improve profitability?" Calculate new break-even and compare to projected volume.
Mental math tip: When dividing, look for patterns. $500K / $20 = $50K / $2 = $25K / $1 = 25,000. Breaking down big numbers makes mental math manageable.
Common Break-Even Mistakes
| Mistake | Why It's Wrong |
|---|---|
| Dividing by price instead of contribution margin | Variable costs exist - each unit doesn't contribute its full price to fixed costs |
| Confusing fixed and variable costs | Putting variable costs in fixed (or vice versa) gives wrong break-even |
| Forgetting contribution margin direction | It's Price - Variable Cost, not Variable Cost - Price |
| Not sanity-checking the answer | Does 2.5 million units seem reasonable for a small product launch? Probably a math error |
Related Concepts
- Profitability Case - Where break-even analysis is frequently applied
- Mental Math - Essential for fast break-even calculations in interviews
- 80/20 Principle - For prioritizing which scenarios to analyze first
Frequently Asked Questions
What is break-even analysis?
Break-even analysis calculates when total revenue equals total costs - the point where profit is zero. The formula is: Break-Even Units = Fixed Costs / (Price - Variable Cost). It tells you how many units must sell to cover all costs.
What is contribution margin?
Contribution margin is Price minus Variable Cost per unit. It's what each unit "contributes" toward covering fixed costs. After break-even, the contribution margin becomes profit per unit sold.
How do I calculate break-even quickly in a case interview?
First, calculate contribution margin (Price - Variable Cost). Then divide Fixed Costs by contribution margin. Use mental math shortcuts: simplify fractions, look for round numbers. Practice with case practice until it becomes automatic.
What if contribution margin is negative?
If variable cost exceeds price, contribution margin is negative. This means the business loses money on every unit sold - it can never break even. The more it sells, the more it loses. This is a fundamentally broken business model.
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Start PracticingLast updated: January 15, 2026