Worked Example: Break-Even Point Analysis
Suppose you run a business selling handmade candles with a fixed cost of ,000/month. Each candle sells for , and variable cost per candle is :
- Calculate contribution margin = Price () - Variable Cost () = per unit
- Compute break-even units = Fixed Costs (,000) / Contribution Margin () ≈ 417 units
- Compute break-even revenue = 417 units × = ,340
Your candle business must sell at least 417 units (,340 in sales) per month to cover all costs and start earning profit.
Break-Even Analysis Principles
Overhead amortization relies on the contribution margin of sales. The formulas are structured as follows:
Frequently Asked Questions
Fixed costs are operational overheads that remain constant regardless of production volumes (e.g. rent, standard software licenses, manager salaries). Variable costs directly scale with each unit manufactured (e.g. raw material, packing logistics, per-unit credit merchant processing fees).
If variable cost is larger than the unit selling price, the contribution margin becomes negative. In this scenario, the business loses money on every unit sold, making a break-even point mathematically impossible. The selling price must be raised or variable costs lowered.