Know the sales volume required to break even

Break-even analysis connects price, variable cost and fixed cost. It helps turn a business idea into a measurable monthly sales requirement.

Classify costs consistently

Fixed costs do not change directly with each unit sold over the period being modeled. Variable costs increase with each unit. Owner compensation, payment fees and delivery costs should be included where they economically belong.

Watch contribution margin

Price minus variable cost is the contribution from each sale. If that amount is small, the business needs much higher volume to cover fixed costs.

Calculate a profit target too

Breaking even only covers modeled costs. Add a target profit to fixed costs before dividing by contribution per sale to estimate the volume needed for the desired result.

Educational information only. Accounting and tax classification may vary.