Quick Answer: Break-even point (units) = Fixed Costs ÷ (Selling Price per unit – Variable Cost per unit). Break-even revenue = Fixed Costs ÷ Contribution Margin Ratio, where Contribution Margin Ratio = (Selling Price – Variable Cost) ÷ Selling Price. A business with ₹3L fixed costs, selling price ₹500, variable cost ₹300, needs to sell 1,500 units to break even.
Break-Even Analysis — The Foundation of Business Planning
Before launching a product or business, break-even analysis helps you understand the minimum sales needed to survive. Beyond the break-even point, every unit sold generates pure profit (after variable costs). It's the most fundamental financial planning tool for any business.
Key Formulas
| Metric | Formula |
|---|---|
| Contribution Margin | Selling Price – Variable Cost per Unit |
| CM Ratio | Contribution Margin / Selling Price × 100 |
| Break-Even Units | Fixed Costs / Contribution Margin |
| Break-Even Revenue | Fixed Costs / CM Ratio |
| Units for Target Profit | (Fixed Costs + Target Profit) / CM |
Frequently Asked Questions
Margin of safety = (Actual Sales – Break-Even Sales) / Actual Sales × 100. It shows how much sales can fall before the business starts making a loss. A 30%+ margin of safety is generally considered healthy.
Fixed costs remain constant regardless of output (rent, salaries, insurance, loan EMIs). Variable costs change with production volume (raw materials, packaging, direct labour, sales commissions). Semi-variable costs have both components (e.g., electricity with a base charge + usage).