Zero-sum game: The break-even analysis

The Break-Even Analysis helps entrepreneurs find out how many units of a product they need to sell in order to generate a profit. At the break-even point, the revenue earned is exactly equal to the sum of all costs.

Finding Out Whether the Business is Worth It

How do entrepreneurs know if their business activity is worthwhile? One way is to simply start selling products and look at the end-of-year statement to see if a positive or negative result has been achieved. However, it would be better if it were ensured beforehand that the business leads to a profit. That is exactly what the Break-Even Analysis is for.

Determining Necessary Sales Volume

In simple terms, the Break-Even Analysis answers the question of what revenue must be achieved at what sales volumes to cover the associated costs. A Break-Even Analysis is worthwhile in the following situations, among others:

• ‍Starting a Business: When starting a business, the Break-Even Analysis helps create a basic financial plan;‍
• ‍Launching a New Product: If a new product is to be brought to market, the Break-Even Analysis can help determine the sales price;‍
• ‍Adapting Sales Channels: If costs change, the Break-Even Analysis simplifies the assessment of the consequences.

Calculating the Break-Even Point

The Break-Even Point is defined as the point where revenue and costs match, resulting in neither profit nor loss for a company. The starting point of the Break-Even Analysis is the costs incurred in the company.

• ‍Fixed Costs: Costs that are incurred regardless of the quantities produced (e.g., rent, utilities, salaries, etc.);‍
• ‍Variable Costs: Costs that depend on the quantities produced (e.g., raw materials, electricity for production machines, etc.).

To calculate the Break-Even Point, the contribution margin must first be determined. This is calculated as follows:

Contribution Margin = Revenue – Variable Costs

Contribution Margin per Unit = Price per Unit – Variable Costs per Unit

The contribution margin indicates whether and to what extent the revenue contributes to covering fixed costs. With its help, the Break-Even Point or the profit threshold can be calculated. This is reached when revenue and total costs correspond.

Revenue – Total Costs = 0

(Price x Quantity Produced) – ((Variable Cost per Unit x Quantity Produced) + Fixed Costs) = 0

By rearranging this equation, we obtain the Break-Even Sales Volume and the Break-Even Price.

Break-Even Sales Volume = Fixed Costs / (Price – Variable Costs)

Example: A company that manufactures chairs has fixed costs of CHF 600 and variable costs of CHF 30 per chair. The chairs are sold at a price of CHF 150. How many chairs must the company sell to break even?

Break-Even Sales Volume = CHF 600 / (CHF 150 – CHF 30) = 5 units

Break-Even Price = Variable Costs + (Fixed Costs / Sales Volume)

Example: A company that manufactures chairs has fixed costs of CHF 600 and variable costs of CHF 30 per chair. It can produce 15 chairs. At what price must the company sell the chairs to break even?

Break-Even Price = CHF 30 + (CHF 600 / 15) = CHF 70

Limitations of the Break-Even Analysis

The Break-Even Analysis is a good way to find out if a business is worthwhile. However, it reaches its limits when costs cannot be accurately estimated. It also helps only to a limited extent in cases of a large variety of products or when the sales of different products are interdependent.

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