Management, Richard Hodgetts & Donald Kuratko, Second Edition, 1986.
ADC Info #3
Assistant Extension Specialist
Agricultural Development Center
One of the most common tools used in evaluating the economic feasibility of a new enterprise or product is the
break-even analysis. The break-even point is the point at which revenue is exactly equal to costs. At this point, no
profit is made and no losses are incurred. The break-even point can be expressed in terms of unit sales or dollar
sales. That is, the break-even units indicate the level of sales that are required to cover costs. Sales above that
number result in profit and sales below that number result in a loss. The break-even sales indicates the dollars of
gross sales required to break-even.
It is important to realize that a company will not necessarily produce a product just because it is expected to break-
even. Many times, a certain level of profitability or return on investment is desired. If this objective cannot be
reached, which may mean selling a substantial number of units above break-even, the product may not be produced.
However, the break-even is an excellent tool to help quantify the level of production needed for a new business or a
Break-even analysis is based on two types of costs: fixed costs and variable costs. Fixed costs are overhead-type
expenses that are constant and do not change as the level of output changes. Variable expenses are not constant
and do change with the level of output. Because of this, variable expenses are often stated on a per unit basis.
Once the break-even point is met, assuming no change in selling price, fixed and variable cost, a profit in the
amount of the difference in the selling price and the variable costs will be recognized. One important aspect of
break-even analysis is that it is normally not this simple. In many instances, the selling price, fixed costs or
variable costs will not remain constant resulting in a change in the break-even.. And these changes will change the
break-even. So, a break-even cannot be calculated only once. It should be calculated on a regular basis to reflect
changes in costs and prices and in order to maintain profitability or make adjustments in the product line.
There are three basic pieces of information needed to evaluate a break-even point:
Average Per Unit Sales Price: ____________________
Average Per Unit Variable Cost: ____________________
Average Annual Fixed Costs: ____________________