Framework library · Finance and valuation
Break-even analysis
Break-even analysis finds the volume at which revenue covers fixed and variable costs. Above it each unit adds its contribution to profit; below it each unit only reduces the loss. The margin of safety (how far the plan sits above break-even) is usually the more useful number.
Use it when
- You are pricing a new product or service and need to know the volume it must reach.
- Fixed costs are about to change, such as a new site or a platform contract, and you need the new break-even.
- You want to see how sensitive profit is to price, cost or volume.
Avoid it when
- Costs are not cleanly fixed or variable, or prices vary a lot by customer. Break even by segment or build a fuller model.
- The product has a long investment period before revenue. Use investment appraisal, which accounts for timing.
- Several products share fixed costs and the mix is changing. Single-product break-even will mislead.
How to run it
Separate fixed and variable costs
Fixed costs do not change with volume over the period (platform, staff, sites). Variable costs rise with each unit (wholesale cost, devices, commissions).
Work out contribution per unit
Price less variable cost. If it is zero or negative, no volume breaks even.
Divide fixed costs by contribution
That is the break-even volume. Multiply by price for break-even revenue.
Compare with the plan
Margin of safety is how far expected volume sits above break-even, as a share of expected volume.
Test the inputs
Change price and variable cost by 10% each way and see what moves most.
Work through it
Answer the questions below, or load the worked example to see a finished one. The drawing updates as you type. Export the result as a PowerPoint deck, a Word document, an Excel workbook, a PDF or plain text.
What you type stays in this browser, so you can close the page and come back to it. It is not sent to Blue Prysm or anyone else, and the exports are made here, on your device. Privacy policy.
Mistakes to avoid
- Treating costs that step up at higher volume (another engineer, another site) as fixed, which puts the break-even point lower than it really is.
- Using list price when the average realised price is lower, which makes the volume needed to break even look smaller than it is.
- Reading break-even as a target. It is the floor.
Where it comes from
Walter Rautenstrauch, professor of industrial engineering at Columbia University, is credited with coining the term break-even point and, with Charles E. Knoeppel, with developing the break-even chart in the early twentieth century. The arithmetic is cost-volume-profit analysis as taught in management accounting. Source.
Use it with
Further reading
Work through it with us
The frameworks here are free to use as they stand. If you would rather work through the question behind this one with us, these are the ways an engagement starts.