What does break-even analysis determine?

Break-even analysis is a financial calculation that helps businesses determine the point at which total revenues equal total costs. This means that at the break-even point, a business is neither making a profit nor incurring a loss. Understanding this point is critical for businesses as it informs them about the minimum sales volume they must achieve to avoid losses. By analyzing the break-even point, companies can set sales targets, make pricing decisions, and assess the viability of new products or services.

Identifying the break-even point involves both fixed costs (expenses that do not change with the level of production or sales, like rent and salaries) and variable costs (expenses that vary directly with production volume, like materials and labor). Knowing these costs allows a business to calculate how many units must be sold at a given price to cover all costs. This analysis is essential for planning and informs strategic decisions related to pricing, marketing, and resource allocation.