break even analysis case study

Hacking the Case Interview

A breakeven analysis is a common quantitative calculation you’ll perform in case interviews. You may need to conduct a breakeven analysis when you are determining whether a company should enter a new market, launch a new product , or acquire a company.

A breakeven analysis helps a company to determine whether or not they should make a particular business decision. All companies have a goal of being profitable from the decisions that they make.

By looking at the circumstances that need to be true in order for a company to recoup its investment costs, a company can see how likely it is that they will be profitable.

If the conditions for breaking even are favorable, a company may decide to pursue an investment. If the conditions for breaking even are unfavorable, the company may decide to pursue something else.

In this article, we’ll cover:

• The breakeven analysis formula for case interviews
• How to interpret breakeven in case interviews
• Breakeven analysis examples in case interviews
• Breakeven analysis case interview tips

If you’re looking for a step-by-step shortcut to learn case interviews quickly, enroll in our case interview course . These insider strategies from a former Bain interviewer helped 30,000+ land consulting offers while saving hundreds of hours of prep time.

Breakeven Analysis Formula for Case Interviews

By definition, breakeven occurs when a company earns as much money as it has spent. In other words, breakeven occurs when the revenue generated from operations has grown to the point that the company has recouped all of its costs.

To get the formula for breakeven, we set profit equal to zero. This is the same thing as setting revenue equal to costs.

Profit = Revenue – Costs

$0 = Revenue - Costs

Revenue = Costs

We can further breakdown revenue as the product of price and quantity of units sold. We can also breakdown costs into variable costs and fixed costs. Remember that variable costs is equal to the quantity of units sold times the variable cost per unit.

Quantity * Price = (Quantity * Variable Cost) + Fixed Costs

We can simplify this formula to get our formula for breakeven analysis.

Fixed Costs = (Price – Variable Cost) * Quantity

This is the only formula you need to know to solve any breakeven problem in a case interview. You should memorize this formula so that you will not need to derive it from scratch during a case interview.

However, if you understand the intuitive meaning behind this formula, as explained in the next section, you won’t even need to memorize it.

How to Interpret Breakeven in Case Interviews

To understand the breakeven formula better, let’s go through each of the terms.

Fixed costs are costs that the company has to incur regardless of how many units of product are produced. Fixed costs include:

Variable costs are costs that increase as the number of units produced increases. They are costs associated with directly producing a unit of product. Variable costs include:  

• Raw materials
• Direct labor

Price is the amount the product is being sold for. In other words, it is the amount of money the company receives for each unit sold.

Finally, quantity is the number of units of product that are sold.

Here is how to understand the formula intuitively in your case interviews.

For each product sold, the company makes an amount of profit equal to the difference between the product’s price and variable cost. If you multiply this by the quantity of units sold, this is the total profit the company makes.

However, the company has fixed costs that it has paid for or needs to pay for. Therefore, the profit made from selling product has to at least equal fixed costs in order for the company to actually be profitable.

If you can understand the concept of breakeven from this perspective, you should be able to immediately recall the breakeven formula in any case interview situation.

Breakeven Analysis Examples in Case Interviews

The breakeven analysis formula has four different terms. When given a breakeven analysis problem in case interview, you’ll typically know three of these terms and be asked to solve for the fourth term that is unknown.

Therefore, there are four different types of questions you could be asked.

Breakeven Analysis Example #1

You operate a lemonade stand that sells a cup of lemonade for $4. The cost to produce a cup of lemonade is $1. To legally operate a lemonade stand, you had to purchase a permit for $600. How many cups of lemonade do you need to sell to break even?

$600 = ($4 - $1) * Quantity

$600 = $3 * Quantity

Quantity = 200

You will need to sell 200 cups of lemonade.

Breakeven Analysis Example #2  

Your company produces and sells widgets. Each widget costs $500 to produce. You have $100,0000 in fixed costs and expect to be able to sell 1,000 widgets. What minimum price do you need to set for your widgets to break even?

$100,000 = (Price - $500) * 1,000

$100 = Price - $500

Price = $600

You need to price your widgets for at least $600.

Breakeven Analysis Example #3

A pharmaceutical company is considering investing money to research a new drug. They believe they can sell 10,000 units of this drug for $201 each over the course of the drug’s lifetime. The cost to produce each drug is $1. How much does the company need to keep research costs under in order to generate a profit?

Fixed Costs = ($201 - $1) * 10,000

Fixed Costs = $200 * 10,000

Fixed Costs = $2,000,000

The company needs to keep fixed costs under $2,000,000.

Breakeven Analysis Example #4

Your company is a roofing tile distributor. You purchase roofing tiles from suppliers and sell them to retailers for a profit. Your annual fixed costs are $100,000. Each tile that you sell is priced at $1 and you sell ten million tiles a year. What is the maximum price per tile that you can purchase tiles for and still break even?

$100,000 = ($1 – Variable Cost) * 10,000,000

$0.01 = $1 – Variable Cost

Variable Cost = $0.99

You can purchase the tiles for $0.99 each at most.

Breakeven Analysis Case Interview Tips

During your case interview, follow these tips to ensure that your breakeven analysis proceeds smoothly.

1. Make sure to include all costs 

When doing breakeven analysis, it is important that you include all of the potential costs involved in managing and operating the business. Leaving out even a single cost element will change your answer.

2. Distinguish between variable costs and fixed costs

Whether a particular cost is a variable cost or a fixed cost can drastically change your answer. Therefore, ensure that you are correctly identifying each cost as either a variable cost or fixed cost.

The simplest way to assess this is to determine whether the cost element would increase if an additional unit is produced. If it does increase, then it is likely a variable cost. If it does not increase, then it is probably a fixed cost.

3. Check that price is greater than variable costs

It is impossible for a company to break even if its variable cost per unit is greater than the price that it charges for its product. Therefore, if you observe that price is less than variable costs, know that there is no way for the company to break even.

4. Talk the interviewer through each of your steps

Whenever you are doing math during a case interview, you want to make it as easy as possible for the interviewer to follow what you are doing. So, before you begin doing any calculations, walk the interviewer through your approach.

Start by explaining the breakeven formula that you are going to be using. Then, as you perform each calculation, talk through exactly what you are doing out loud.

This is beneficial for two reasons. One, you’ll be less likely to make math mistakes if you are talking through the calculations out loud. Two, it will be easier for the interviewer to give you hints or help you out if they know exactly what you are doing.

5. State the implications of your answer 

Once you finish calculating your answer, don’t just stop there. Remember, the purpose of a breakeven analysis is to help a company determine whether it should make a particular investment.

Based on the answer that you calculated, do you think the company can realistically achieve the conditions to at least break even? If so, you could hypothesize that the company should make the investment. If not, you should consider what the company could do to increase the likelihood that it will be profitable.

Stating the implications of your breakeven analysis demonstrates that you are a proactive problem solver. This is a quality that separates outstanding case interview candidates from average candidates.

Learn Case Interviews 10x Faster

Here are the resources we recommend to learn the most robust, effective case interview strategies in the least time-consuming way:

• Comprehensive Case Interview Course (our #1 recommendation): The only resource you need. Whether you have no business background, rusty math skills, or are short on time, this step-by-step course will transform you into a top 1% caser that lands multiple consulting offers.
• Hacking the Case Interview Book   (available on Amazon): Perfect for beginners that are short on time. Transform yourself from a stressed-out case interview newbie to a confident intermediate in under a week. Some readers finish this book in a day and can already tackle tough cases.
• The Ultimate Case Interview Workbook (available on Amazon): Perfect for intermediates struggling with frameworks, case math, or generating business insights. No need to find a case partner – these drills, practice problems, and full-length cases can all be done by yourself.
• Case Interview Coaching : Personalized, one-on-one coaching with former consulting interviewers
• Behavioral & Fit Interview Course : Be prepared for 98% of behavioral and fit questions in just a few hours. We'll teach you exactly how to draft answers that will impress your interviewer
• Resume Review & Editing : Transform your resume into one that will get you multiple interviews

Land Multiple Consulting Offers

Complete, step-by-step case interview course. 30,000+ happy customers.

Use Our Resources and Tools to Get Started With Your Preparation!

Break-even analysis, a break-even analysis helps determine the point at which total revenues equal total costs.

A break-even analysis helps to determine the number of  product   units that need to be sold for a business to be profitable,  knowing the price and the cost of the product. It is crucial to understand the concept of  fixed and variable costs  to correctly calculate the break-even point during your case interview , but also in your daily work as a consultant. If the fixed costs are greater than zero, then it is important to have a positive contribution margin per unit (i.e. price>variable costs) to reach a break-even point at all.

A break-even analysis helps illustrate the relationship between profits, revenues, and costs

Because of the  positive contribution margin, the slope of the revenue line is steeper than the slope of the total costs line . Therefore, revenue per unit is higher than cost per unit. If there were no fixed costs, then obviously the business would be profitable from the beginning. In the example shown above, the costs involved when zero units are sold are the fixed costs only. To cover these fixed costs,  the business needs to  sell a certain number of units  to reach this  break-even point  or cover the fixed costs. 

High break-even points usually suggest that a business could benefit from economies of scale

A detailed break-even analysis can provide some insight regarding the economics of a certain project or the entire industry. Imagine you come across a business that has a high break-even point, since the business needs to sell a lot of products to become profitable (e.g., Intel). This scenario is usually due to  large fixed costs (so-called asset-heavy industries) which need to be covered by high product sales. In such situations, economies of scale play a major role: The more units you sell, the more you cover the fixed costs. In addition, due to the experience/learning curve, you tend to have fewer variable costs and therefore more control over prices . Also, high fixed costs are a serious entry barrier for new competitors (see Porter's Five Forces for more details).

Apply the break-even analysis in weak profitability situations

For instance, your client is operating at increasing losses even though revenues have increased. You find that the issue is increased costs because of a  newly opened factory . The  additional fixed costs are still higher  than the gain in revenues, leading to losses. 

In this case, we can start by hypothesizing the need to increase revenues  to fix profitability. In this scenario, it would make sense to check the break-even number of units sold before recommending increased marketing efforts. For a break-even analysis, you need to have information such as fixed costs, variable costs, and price.

Required data

• Yearly fixed costs: $50m
• Average variable cost/product: $1000
• Average price/product: $1500

Calculation

• Profit/product: $1,500 - $1,000 = $500
• $500 * x units = $50m
• x units = 100,000

As a result, the factory needs to produce and sell 100,000 units. Make sure to check its feasibility and if infeasible, your advice could be to  divest the new factory .

Key takeaways

• At the break-even point, a business has no net gain/loss .
• To determine the break-even point, you will need a  breakdown of the costs and revenues  of the product.

Related Cases

Caribbean Island – MBB Final Round

Bain 1st Round Case – BlissOttica

Rally racing, universal tv.

Facilities in a restroom

Igniting Brilliance, Inspiring Success with Regenesys. Enrol Now --> Enrol Now

Get Free Consultation

By submitting this form, you agree to our Terms & Conditions.

Case Study: Understanding Break-Even Analysis

Please rate this article

2.5 / 5. 27

Join Regenesys’s 25+ Years Legacy

Awaken your potential.

• Latest Posts

• Is a Doctorate in Business Management As Good As a PhD? - November 28, 2022
• Why the Global Value chain is important for growth - July 21, 2022
• Case Study: Understanding Break-Even Analysis - July 21, 2022

Break Even Analysis allows you to evaluate if your business is making a profit or not, so is integral in not only running a business, but also in directing the future of the business.

Break-Even Analysis Case Study: The Achar Company

The Achar Company is a small company started in 2020. They produce and distribute 10 kg buckets of achar. The Achar Company makes delicious affordable achar from the scratch using fresh and quality ingredient and delivering at a small fee according to orders across Gauteng.

The Selling Price per unit is R350 per 10 kg bucket of achar and the variable costs per bucket are R100, and that makes the gross profit to be R250 per bucket, but the fixed costs are R15250 per month.

In conclusion, we can see that this business is making enough profit only to cover the monthly fixed costs therefore the business is not making profit nor making a loss.

As the business owner, they can also identify other ideas in order to make profit. Such as:  

• Increase the selling price per unit.
• Increase production units per month (make more Buckets of achar per months).
• Add another achar making machine,
• Rent a cheaper place
• Restructure or retrenchment
• Reduce salaries
• Review cheaper insurances etc.

Dr Dennis Mark Laxton

DBA, MBL, MBA, BTech Academic Team Leader and Senior Lecturer Regenesys Business School

Related Posts

Bbpress public forum.

Unlocking the Power Within: The Profound Benefits of Mental, Physical Strength and Endurance 

Write a comment cancel reply.

Save my name, email, and website in this browser for the next time I comment.

• Explore Courses
• Digital Programmes
• Digital Regenesys

• SUGGESTED TOPICS
• The Magazine
• Newsletters
• Managing Yourself
• Managing Teams
• Work-life Balance
• The Big Idea
• Data & Visuals
• Reading Lists
• Case Selections
• HBR Learning
• Topic Feeds
• Account Settings
• Email Preferences

A Quick Guide to Breakeven Analysis

It’s a simple calculation, but do you know how to use it?

In a world of Excel spreadsheets and online tools, we take a lot of calculations for granted. Take breakeven analysis. You’ve probably heard of it. Maybe even used the term before, or said: “At what point do we break even?” But because you may not entirely understand the math — and because understanding the formula can only deepen your understanding of the concept — here’s a closer look at how the concept works in reality.

• Amy Gallo is a contributing editor at Harvard Business Review, cohost of the Women at Work podcast , and the author of two books: Getting Along: How to Work with Anyone (Even Difficult People) and the HBR Guide to Dealing with Conflict . She writes and speaks about workplace dynamics. Watch her TEDx talk on conflict and follow her on LinkedIn . amyegallo

Partner Center

• HR & Payroll

Break-Even Analysis Explained - Full Guide With Examples

Did you know that 30% of operating small businesses are losing money? Running your own business is trickier than it sounds. You have to plan ahead carefully to break-even or be profitable in the long run.

Building your own small business is one of the most exciting, challenging, and fun things you can do in this generation.

To start and sustain a small business it is important to know financial terms and metrics like net sales, income statement and most importantly break-even point .

Performing break-even analysis is a crucial activity for making important business decisions and to be profitable in business.

So how do you do it? That is what we will go through in this article. Some of the key takeaways for you when you finish this guide would be:

• Understand what break-even point is
• Know why it is important
• Learn how to calculate break-even point
• Know how to do break-even analysis
• Understand the limitations of break-even analysis

So, if you are tired of your nine-to-five and want to start your own business, or are already living your dream, read on.

What is Break-Even Point?

Small businesses that succeeds are the ones that focus on business planning to cross the break-even point, and turn profitable .

In a small business, a  break-even point is a point at which total revenue equals total costs or expenses. At this point, there is no profit or loss — in other words, you 'break-even'.

Break-even as a term is used widely, from stock and options trading to corporate budgeting as a margin of safety measure.

On the other hand, break-even analysis lets you predict, or forecast your break-even point. This allows you to course your chart towards profitability.

Managers typically use break-even analysis to set a price to understand the economic impact of various price and sales volume calculations.

The total profit at the break-even point is zero. It is only possible for a small business to pass the break-even point when the dollar value of sales is greater than the fixed + variable cost per unit.

Every business must develop a break-even point calculation for their company. This will give visibility into the number of units to sell, or the sales revenue they need, to cover their variable and fixed costs.

Importance of Break-Even Analysis for Your Small Business

A business could be bringing in a lot of money; however, it could still be making a loss. Knowing the break-even point helps decide prices, set sales targets, and prepare a business plan.

The break-even point calculation is an essential tool to analyze critical profit drivers of your business, including sales volume, average production costs, and, as mentioned earlier, the average sales price. Using and understanding the break-even point, you can measure

• how profitable is your present product line
• how far sales drop before you start to make a loss
• how many units you need to sell before you make a profit
• how decreasing or increasing price and volume of product will affect profits
• how much of an increase in price or volume of sales you will need to meet the rise in fixed cost

How to Calculate Break-Even Point

There are multiple ways to calculate your break-even point.

Calculate Break-even Point based on Units

One way to calculate the break-even point is to determine the number of units to be produced for transitioning from loss to profit.

For this method, simply use the formula below:

Break-Even Point (Units) = Fixed Costs ÷ (Revenue per Unit – Variable Cost per Unit)

Fixed costs are those that do not change no matter how many units are sold. Don't worry, we will explain with examples below. Revenue is the income, or dollars made by selling one unit.

Variable costs include cost of goods sold, or the acquisition cost. This may include the purchase cost and other additional costs like labor and freight costs.

Calculate Break-Even Point by Sales Dollar - Contribution Margin Method

Divide the fixed costs by the contribution margin. The contribution margin is determined by subtracting the variable costs from the price of a product. This amount is then used to cover the fixed costs.

Break-Even Point (sales dollars) = Fixed Costs ÷ Contribution Margin

Contribution Margin = Price of Product – Variable Costs

Let’s take a deeper look at the some common terms we have encountered so far:

• Fixed costs: Fixed costs are not affected by the number of items sold, such as rent paid for storefronts or production facilities, office furniture, computer units, and software. Fixed costs also include payment for services like design, marketing, public relations, and advertising.
• Contribution margin:   Is calculated by subtracting the unit variable costs from its selling price. So if you’re selling a unit for $100 and the cost of materials is $30, then the contribution margin is $70. This $70 is then used to cover the fixed costs, and if there is any money left after that, it’s your net profit.
• Contribution margin ratio: is calculated by dividing your fixed costs from your contribution margin. It is expressed as a percentage. Using the contribution margin, you can determine what you need to do to break-even, like cutting fixed costs or raising your prices.
• Profit earned following your break-even: When your sales equal your fixed and variable costs, you have reached the break-even point. At this point, the company will report a net profit or loss of $0. The sales beyond this point contribute to your net profit.

Small Business Example for Calculating Break-even Point

To show how break-even works, let’s take the hypothetical example of a high-end dressmaker. Let's assume she must incur a fixed cost of $45,000 to produce and sell a dress.

These costs might cover the software and materials needed to design the dress and be sure it meets the requirement of the brand, the fee paid to a designer to design the look and feel of the dress, and the development of promotional materials used to advertise the dress.

These costs are fixed as they do not change per the number of dresses sold.

The variable costs would include the materials used to make each dress — embellishment’s for $30, the fabric for the body for $20, inner lining for $10 — and the labor required to assemble the dress, which amounted to one and a half hours for a worker earning $50 per hour.

Thus, the unit variable costs to make a single dress is $110 ($60 in materials and $50 in labor). If she sells the dress for $150, she’ll make a unit margin of $40.

Given the $40 unit margin she’ll receive for each dress sold, she will cover her $45,500 total fixed cost will be covered if she sells:

Break-Even Point (Units) = $45,000 ÷ $40 = 1,125 Units

You can see per the formula , on the right-hand side, that the Break-even is 1,125 dresses or units

In other words, if this dressmaker sells 1,125 units of this particular dress, then she will fully recover the $45,000 in fixed costs she invested in production and selling. If she sells fewer than 1,125 units, she will lose money. And if she sells more than 1,125 units, she will turn a profit. That’s the break-even point.

What if we change the price?

Suppose our dressmaker is worried about the current demand for dresses and has concerns about her firm’s sales and marketing capabilities, calling into question her ability to sell 1,125 units at a price of $150. What would be the effect of increasing the price to $200?

This would increase the unit margin to $90.Then the number of units to be sold would decline to 500 units. With this information, the dressmaker could assess whether she was better off trying to sell 1,125 dresses at $150 or 500 dresses at $200, and priced accordingly.

What if we want to make an investment and increase the fixed costs?

Break-even analysis also can be used to assess how sales volume would need to change to justify other potential investments. For instance, consider the possibility of keeping the price at $150, but having a celebrity endorse the dress (think Madonna!) for a fee of $20,000.

This would be worthwhile if the dressmaker believed that the endorsement would result in total sales of $66,000 (the original fixed cost plus the $20,000 for Ms. Madonna).

With the Fixed Costs at $66,000 we see, it would only be worthwhile if the dressmaker believed that the endorsement would result in total sales of 1,650 units.

In other words, if the endorsement led to incremental sales of 525 dress units, the endorsement would break-even. If it led to incremental sales of greater than 525 dresses, it would increase profits.

What if we change the variable cost of producing a good?

Break-even also can be used to examine the impact of a potential change to the variable cost of producing a good.

Imagine that our dressmaker could switch from using a rather plain $20 fabric for the dress to a higher-end $40 fabric, thereby increasing the variable cost of the dress from $110 to $130 and decreasing the unit margin from $40 to $20. How much would your sales need to increase to compensate for the extra cost?

Suppose the Variable Cost is $130 (and the Fixed Cost is $45,000 – our dressmaker can’t afford to have nice fabric plus get Ms. Madonna). It would make better sense to switch to the nicer fabric if the dressmaker thought it would result in sales of 2,250 units, an additional 1125 dresses, which is double the number of initial sale numbers.

You likely aren’t a dressmaker or able to get a celebrity endorsement from Ms. Madonna, but you can use break-even analysis to understand how the various changes of your product, from revenue, costs, sales, impact your small business’s profitability .

What Are the Benefits of Doing a Break-even Analysis?

Smart Pricing : Finding your break-even point will help you price your products better. A lot of effort and understanding goes into effective pricing, but knowing how it will affect your profitability is just as important. You need to make sure you can pay all your bills.

Cover Fixed Costs : When most people think about pricing, they think about how much their product costs to create. Those are considered variable costs. You will still need to cover your fixed costs like insurance or web development fees. Doing a break-even analysis helps you do that.

Avoid Missing Expenses : When you do a break-even analysis, you have to lay out all your financial commitments to figure out your break-even point. It’s easy to forget about expenses when you’re thinking through a business idea.  This will limit the number of surprises down the road.

Setting Revenue Targets : After completing a break-even analysis, you know exactly how much you need to sell to be profitable. This will help you set better sales goals for you and your team.

Decision Making : Usually, business decisions are based on emotion. How you feel is important, but it’s not enough. Successful entrepreneurs make their decisions based on facts. It will be a lot easier to decide when you’ve put in the work and have useful data in front of you.

Manage Financial Strain : Doing a break-even analysis will help you avoid failures and limit the financial toll that bad decisions can have on your business. Instead, you can be realistic about the potential outcomes by being aware of the risks and knowing when to avoid a business idea.

Business Funding : For any funding or investment, a break-even analysis is a key component of any business plan. You have to prove your plan is viable. It’s usually a requirement if you want to take on investors or other debt to fund your business.

When to Use Break-even Analysis

Starting a new business.

If you’re thinking about a small online business or e-commerce, a break-even analysis is a must. Not only does it help you decide if your business idea is viable, but it makes you research and be realistic about costs, as well as think through your pricing strategy.

Creating a new product

Especially for a small business, you should still do a break-even analysis before starting or adding on a new product in case that product is going to add to your expenses. There will be a need to work out the variable costs related to your new product and set prices before you start selling.

Adding a new sales channel

If you add a new sales channel, your costs will change. Let's say you have been selling online, and you’re thinking about opening an offline store; you’ll want to make sure you at least break-even with the brick and mortar costs added in. Adding additional marketing channels or expanding social media spends usually increases daily expenses. These costs need to be part of your break-even analysis.

Changing the business model

Let's say you are thinking about changing your business model; for example, switching from buying inventory to doing drop shipping or vice-versa, you should do a break-even analysis. Your costs might vary significantly, and this will help you figure out if your prices need to change too.

Limitations of Break-even Analysis

• The Break-even analysis focuses mostly on the supply-side (i.e., costs only) analysis. It doesn't tell us what sales are actually likely to be for the product at various prices.
• It assumes that fixed costs are constant. However, an increase in the scale of production is likely to lead to an increase in fixed costs.
• It assumes average variable costs are constant per unit of output, per the range of the number of sales
• It assumes that the number of goods produced is equal to the number of goods sold. It believes that there is no change in the number of goods held in inventory at the beginning of the period and the number of goods held in inventory at the end of the period
• In multi-product companies,  the relative proportions of each product sold and produced are fixed or constant.

So that's a wrap. Hope you found this article interesting and informative. Feel free to subscribe to our blog to get updates on awesome new content we publish for small business owners.

Key Takeaways

Break-even analysis is infinitely valuable as it sets the framework for pricing structures, operations, hiring employees, and obtaining future financial support.

• You can identify how much, or how many, you have to sell  to be profitable.
• Identify costs inside your business that should be alleviated or eliminated.

Remember, any break-even analysis is only as strong as its underlying assumptions.

Like many forecasting metrics, break-even point is subject to it's limitations; however it can be a powerful and simple tool to provide a small business owner with an idea of what their sales need to be in order to start being profitable as quickly as possible.

Lastly, please understand that break-even analysis is not a predictor of demand .

If you go to market with the wrong product or the wrong price, it may be tough to ever hit the break-even point. To avoid this, make sure you have done the groundwork before setting up your business.

Head over to our small business guide on setting up a new business if you want to know more.

Want to calculate break even point quickly? Use our handy break-even point calculator.

Hey! Try Deskera Now!

Everything to Run Your Business

Get Accounting, CRM & Payroll in one integrated package with Deskera All-in-One .

How it works

For Business

Join Mind Tools

Article • 6 min read

Break-Even Analysis

Determining when a product becomes profitable.

By the Mind Tools Content Team

In business, your ultimate objective is to make money.

So, when you launch a new product or purchase a new piece of equipment, how do you know whether a potential investment will at least cover the costs associated with it?

You could simply make a wish and hope it all works out – or you can evaluate the project more formally to see if it makes financial sense. One way of doing this is to complete a Break-Even Analysis.

This determines the break-even point – the level of output at which the revenues generated by a project equal costs. At the break-even point, you don't make or lose money. Once you pass break-even, you make money; below break-even, you lose it.

Using a Break-Even Analysis, you can answer questions like:

• What are the projected profits and losses at any given output level?
• At what minimum sales level do you avoid making a loss?
• Do your sales projections for a new product exceed break-even?
• If you drop a product, will your break-even improve?
• How will raising or lowering prices affect your profitability?
• If costs increase, what is the effect on your break-even position?
• How does investing in facility improvements affect your break-even point?

Calculating the Break-Even Point

Determining the break-even point involves a simple mathematical equation. You reach break-even at the point where total costs (TC) equal total revenues (TR), or

Total costs have fixed and variable components:

• Fixed costs (FC) remain the same, regardless of your output. Rent, insurance, and base salaries are examples of fixed costs.
• Variable costs (VC) change with the number of units produced or sold. Examples are materials, sales commissions, and direct labor costs. Therefore, total variable costs (TVC) equal the variable costs multiplied by the number of units, or TVC = n x VC, where n is the number of units.
• Total costs equal total fixed costs plus total variable costs: TC = FC + (n x VC).

You can see how these costs vary with the number of units sold in figure 1, below:

Total revenue is the price charged per unit multiplied by the number of units produced or sold: TR = n x P, where P equals the unit price.

Again, you can see the line for Total Revenue in figure 1, with break-even occurring where the TR line crosses the TC line.

You can calculate the break-even point by expanding the break-even equation:

TC = TR FC + (n x VC) = n x P

Solving for n gives you the number of units you need to break even:

n = FC/(P – VC)

If you have a specific profit target, you can use the break-even equation to calculate the number of units you must sell to achieve that target:

n x P = FC + (n x VC) + Profit n = (FC + Profit)/(P – VC)

A Break-Even Example

Let's imagine that you're considering launching a new product. Market research has shown that customers will pay $115 for it, and your sales team is confident that they can sell at least 500 units per month. The equipment you'll need to produce the product costs $900,000 and this will be spread over three years, giving you a fixed cost of $25,000 per month. You need to decide if the product is financially viable.

To calculate the break-even point, use this equation:

n = FC/(P – VC) n = 25,000/(115 – 50) n = 384.6

The break-even point is 385 units per month. This is below the minimum sales volume that the sales team thinks they can achieve, so the product has a good chance of making money.

Break-Even Analysis can also be useful in thinking about pricing. For example, how much would the break-even point increase if you reduced the price to $105? This should increase the sales volume, but would that compensate enough for the lower price? Using the break-even point, you can manipulate a variety of costs and revenue variables to understand the effects of various scenarios.

Limitations of Break-Even Analysis

A Break-Even Analysis is best used as a preliminary planning tool. In our example, there are many other issues to consider. What is the opportunity cost of spending $900,000 on the equipment as a capital expense, as opposed to investing the money in something else? Would another product give a better Return on Investment (RoI)?

Break-Even Analysis is also very restrictive in what it includes in the equation. Cost and revenue calculations can be much more complex than those considered in a Break-Even Analysis. Material costs and other costs can change dramatically, and it's not always clear which fixed costs should be included. For example, what portion of executive salaries should you use? Break-Even Analysis also doesn't consider cash flow or how the proposed project might affect economies of scale , nor does it take into account the value of money as it varies with time.

For these reasons and many others, Break-Even Analysis is most often used in the early stages of thinking about a decision. From there, you can decide whether further analysis is needed.

Break-even is the point at which the costs associated with production equal the revenue generated.

To use Break-Even Analysis effectively, you should have a reasonable understanding of the costs involved in your operations.

When it's used as a general decision-making tool, Break-Even Analysis can highlight projects that have a good chance of contributing to profits and those that don't. It's not the tool to use for your final decision, but it can be useful for the early planning stages.

You've accessed 1 of your 2 free resources.

Get unlimited access

Discover more content

Getting your team through the holiday season.

Relieving Holiday-Induced Stress

Scope Control

Avoiding Too Many Changes in Projects

Add comment

Comments (0)

Be the first to comment!

Get 20% off your first year of Mind Tools

Our on-demand e-learning resources let you learn at your own pace, fitting seamlessly into your busy workday. Join today and save with our limited time offer!

Sign-up to our newsletter

Subscribing to the Mind Tools newsletter will keep you up-to-date with our latest updates and newest resources.

Subscribe now

Business Skills

Personal Development

Leadership and Management

Member Extras

Most Popular

Newest Releases

Pain Points Podcast - Balancing Work And Kids

Pain Points Podcast - Improving Culture

Mind Tools Store

About Mind Tools Content

Discover something new today

Pain points podcast - what is ai.

Exploring Artificial Intelligence

Pain Points Podcast - How Do I Get Organized?

It's Time to Get Yourself Sorted!

How Emotionally Intelligent Are You?

Boosting Your People Skills

Self-Assessment

What's Your Leadership Style?

Learn About the Strengths and Weaknesses of the Way You Like to Lead

Recommended for you

How to make "high-quality connections".

Creating an Energetic Workplace

Business Operations and Process Management

Strategy Tools

Customer Service

Business Ethics and Values

Handling Information and Data

Project Management

Knowledge Management

Self-Development and Goal Setting

Time Management

Presentation Skills

Learning Skills

Career Skills

Communication Skills

Negotiation, Persuasion and Influence

Working With Others

Difficult Conversations

Creativity Tools

Self-Management

Work-Life Balance

Stress Management and Wellbeing

Coaching and Mentoring

Change Management

Team Management

Managing Conflict

Delegation and Empowerment

Performance Management

Leadership Skills

Developing Your Team

Talent Management

Problem Solving

Decision Making

Member Podcast

• Search Search Please fill out this field.

What Is Break-Even Analysis?

Break-even point formula.

• Calculating BEP and Contribution Margin

Who Calculates the BEP?

Why break-even analysis matters, the bottom line.

• Investing Basics

Break-Even Analysis: Formula and Calculation

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

Gordon Scott has been an active investor and technical analyst or 20+ years. He is a Chartered Market Technician (CMT).

Break-even analysis compares income from sales to the fixed costs of doing business. Five components of break-even analysis include fixed costs, variable costs, revenue, contribution margin, and break-even point (BEP). When companies calculate the BEP, they identify the amount of sales required to cover all fixed costs to begin generating a profit. The break-even point formula can help find the BEP in units or sales dollars.

Key Takeaways:

• Using the break-even point formula, businesses can determine how many units or dollars of sales cover the fixed and variable production costs.
• The break-even point (BEP) is considered a measure of the margin of safety.
• Break-even analysis is used broadly, from stock and options trading to corporate budgeting for various projects.

Investopedia / Paige McLaughlin

Break-even analysis involves a calculation of the break-even point (BEP) . The break-even point formula divides the total fixed production costs by the price per individual unit, less the variable cost per unit.

BEP = Fixed Costs / (Price Per Unit - Variable Cost Per Unit)

Break-even analysis looks at the fixed costs relative to the profit earned by each additional unit produced and sold. A firm with lower fixed costs will have a lower break-even point of sale and $0 of fixed costs will automatically have broken even with the sale of the first product, assuming variable costs do not exceed sales revenue. Fixed costs remain the same regardless of how many units are sold. Examples of fixed and variable costs include:

Calculating the Break-Even Point and Contribution Margin

Break-even analysis and the BEP formula can provide firms with a product's contribution margin. The contribution margin is the difference between the selling price of the product and its variable costs. For example, if an item sells for $100, with fixed costs of $25 per unit, and variable costs of $60 per unit, the contribution margin is $40 ($100 - $60). This $40 reflects the revenue collected to cover the remaining fixed costs, which are excluded when figuring the contribution margin.

Contribution Margin = Item Price - Variable Cost Per Unit

To find the total units required to break even, divide the total fixed costs by the unit contribution margin. Assume total fixed costs are $20,000. With a contribution margin of $40 above, the break-even point is 500 units ($20,000 divided by $40). Upon selling 500 units, the payment of all fixed costs is complete, and the company will report a net profit or loss of $0.

BEP (Units) = Total Fixed Costs / Contribution Margin

To calculate the break-even point in sales dollars, divide the total fixed costs by the contribution margin ratio. The contribution margin ratio is the contribution margin per unit divided by the sale price.

Contribution Margin Ratio = Contribution Margin Per Unit / Item Price

BEP (Sales Dollars) = Total Fixed Costs / Contribution Margin Ratio

The contribution margin ratio is 40% ($40 contribution margin per item divided by $100 sale price per item). The break-even point in sales dollars is $50,000 ($20,000 total fixed costs divided by 40%).

In accounting, the margin of safety is the difference between actual sales and break-even sales. Managers utilize the margin of safety to know how much sales can decrease before the company or project becomes unprofitable.

• Entrepreneurs
• Financial Analysts
• Stock and Option Traders
• Government Agencies

Although investors are not interested in an individual company's break-even analysis on their production, they may use the calculation to determine at what price they will break even on a trade or investment. The calculation is useful when trading in or creating a strategy to buy options or a fixed-income security product.

• Pricing : Businesses get a comprehensible perspective on their cost structure with a break-even analysis, setting prices for their products that cover their fixed and variable costs and provide a reasonable profit margin.
• Decision-Making : When it comes to new products and services, operational expansion, or increased production, businesses can chart their profit to sales volume and use break-even analysis to help them make informed decisions surrounding those activities.
• Cost Reduction : Break-even analysis helps businesses find areas to reduce costs to increase profitability.
• Performance Metric: Break-even analysis is a financial performance tool that helps businesses ascertain where they are in achieving their goals.

What Are Some Limitations of Break-Even Analysis?

Break-even analysis assumes that the fixed and variable costs remain constant over time. Costs may change due to factors such as inflation, changes in technology, or changes in market conditions. It also assumes that there is a linear relationship between costs and production. Break-even analysis ignores external factors such as competition, market demand, and changes in consumer preferences.

What Are the Components of Break-Even Analysis?

There are five components of break-even analysis including fixed costs, variable costs, revenue, contribution margin, and the break-even point (BEP).

Why Is the Contribution Margin Important in Break-Even Analysis?

The contribution margin represents the revenue required to cover a business' fixed costs and contribute to its profit. Through the contribution margin calculation, a business can determine the break-even point and where it can begin earning a profit.

How Do Businesses Use the Break-Even Point in Break-Even Analysis?

The break-even point (BEP) helps businesses with pricing decisions, sales forecasting, cost management, and growth strategies. A business would not use break-even to measure its repayment of debt or how long that repayment will take to complete.

Break-even analysis is a tool used by businesses and stock and option traders. Break-even analysis is essential in determining the minimum sales volume required to cover total costs and break even. It helps businesses choose pricing strategies, and manage costs and operations. In stock and options trading, break-even analysis helps find the minimum price movements required to cover trading costs and make a profit. Traders can use break-even analysis to set realistic profit targets, manage risk, and make informed trading decisions.

U.S. Small Business Administration. " Break-Even Point ."

Professor Rosemary Nurre, College of San Mateo. " Accounting 131: Chapter 6, Cost-Volume-Profit Relationships ."

• Terms of Service
• Editorial Policy
• Privacy Policy
• Your Privacy Choices

• Memberships

Break Even Analysis (BEA)

Break Even Analysis: this article explains the concept of a Break Even Analysis . After assimilating it, you will be able to understand and calculate this important financial indicator .

What is a Break Even Analysis?

The Break Even Analysis (BEA) is a useful tool to study the relation between fixed costs and variable costs and revenue. It’s inextricably linked to the Break Even Point (BEP), which indicates at what moment an investment will start generating a positive return.

It can be graphically represented or calculated with a simple mathematical calculation. A Break-Even Analysis calculates the size of the production at a certain (selling) price that is necessary to cover all the costs that have been incurred.

Break Even Analysis components

To understand how this analysis works, it’s wise to at least mention the following cost concepts.

Fixed costs

Fixed costs are also called overhead . These costs are always occur after the decision to start an economic activity and they relate directly to the level of production, but not the quantity of production. Fixed costs include (but are not limited to) depreciation of materials, interest costs, taxes and general overhead costs (labour costs, energy costs, depreciation costs).

A carpentry business that mainly makes tables, chairs and closets, employs 50 people. The business has a large number of fixed costs.

It’s about costs that come back every month and stay the same, and can only change after a year. Think for instance of salaries, monthly energy bills and the depreciation costs of current assets (including machines) and fixed assets (such as a building).

Variable costs

Variable costs are costs that change in direct relation to the volume of production. This concerns for instance selling costs, production costs, fuel and other costs that are directly related to the production of goods or an investment in capital.

For a carpentry business, mainly the costs for raw materials, auxiliary materials, semi-finished goods such as wood, nails and copper handles, are variable. If they are producing 50 closets per month, they use less than when they produce 75 closets in some other month. Therefore, these costs vary every month.

Financial Tool

The Break Even Analysis is a handy tool to decide if a company should or should not start producing and selling a product.

In addition, you can calculate the Break Even Point (BEP), also known as the critical point . It is the turnover at which the total revenue would equal the total costs. In that case, the organisation would break even and both the fixed and variable costs will be earned back.

If the turnover is lower than the total costs, it’s a loss. Everything over this critical point can be booked as profit.

Break Even Analysis formula

In order to calculate the Break Even Point within the Break Even Analysis, you need certain data, namely the fixed costs, the selling price of the product and the variable costs per product.

The Break Even Point is determined by the moment when the fixed costs have been earned back. That only happens because of the so-called contribution margin; the selling price minus the variable costs.

When the fixed costs are divided by the contribution margin, you get the Break-Even Point. See the picture below for the Break-Even Point formula:

Break Even Point = fixed costs / ( selling price – variable costs )

Break Even Analysis example

The previously mentioned carpentry business is planning to make a new closet.

It’s a Bohemian model of rough, white-washed woos with two doors and a drawer at the bottom. The closet is almost two metres high, 1.50 metres wide and 0.5 metres deep. There are shelves in the closet and there is an area to hang up clothes, making it suitable as a wardrobe. It would be a good idea for the director to first consider certain data before he decides to start production of the closet.

• The expected selling price is $1,000.
• The fixed costs average $210,000 per year (monthly labour costs, energy costs, interest and depreciation costs).
• The purchasing price of the wood, auxiliary materials and semi-finished products is $400 per closet and make up the variable costs.

With this data, the director will determine the Break-Even Point and he makes the following calculation:

Break Even Point = $210.000 / ( $1000 – $400 ) = 350 items

Cooperation

The above shows that good communication and pleasant cooperation between the Purchasing, Sales and Production departments of a business is very important. Together they will reach a joint conclusion.

It might be impossible for the Sales department to sell more than 350 of these closets.

It might be feasible, but the $1,000 selling price might be too high, leading to the salespeople recommending a more competitive selling price of $750. When that happens, something changes in the Break-Even Point and they will need to sell more than 350 closets before making a profit.

The Purchasing department on the other hand can make sure that raw materials, auxiliary materials and semi-finished products are purchased at more affordable rates, reducing the variable costs. Together with the Sales department, they can also opt to stick to the high selling price, ensuring that they will turn a profit sooner when they sell 350 closets. Lastly, it’s the Production department’s turn.

For them it’s about efficiently handling raw materials. Waste needs to be avoided in order to reduce the variable costs.

An efficient and effective approach will also help with the speed of production, allowing more closets to be produced in less time. Of course, other departments are also linked to this system.

For instance, it’s the Marketing department’s task to offer the closets in an attractive way using various channels, including shops, online shops, design magazines and so on.

Break Even Analysis advantages

The main advantage of a Break-Even Point is that it explains the relationship between costs, production volume and revenue. This analysis can be expanded to show how the changes between fixed and changing cost relations will affect profit levels and the Break-Even Point in for instance product prices or turnovers.

The Break Even Analysis is particularly useful when it is combined with partial budgeting techniques.

It’s Your Turn

What do you think? How do you apply the Break Even Analysis in your business life? Do you recognize the practical explanation or do you have more additions? What are your success factors for conducting financial calculations such as the Break-Even Point?

Share your experience and knowledge in the comments box below.

More information

• Alhabeeb, M. J. (2012). Break‐Even Analysis. Mathematical Finance, 247-273.
• Cafferky, M. (2010). Break Even Analysis . Business Expert Press.
• Gutierrez, P. H., & Dalsted, N. L. (1990). Break-even method of investment analysis. Colorado State University Cooperative Extension.
• Sadiku, M. (2017). Practical Guide on Writing a Persuasive Business Plan: Sample Business Plan, Break-even Analysis, and Detailed Business Plan Outline . Independently published.

How to cite this article: Mulder, P. (2017). Break Even Analysis (BEA) . Retrieved [insert date] from Toolshero: https://www.toolshero.com/financial-management/break-even-analysis/

Published on: 02/27/2017 | Last update: 01/26/2022

Add a link to this page on your website: <a href=” https://www.toolshero.com/financial-management/break-even-analysis/”>Toolshero: Break Even Analysis (BEA)</a>

Did you find this article interesting?

Your rating is more than welcome or share this article via Social media!

Average rating 4 / 5. Vote count: 6

No votes so far! Be the first to rate this post.

We are sorry that this post was not useful for you!

Let us improve this post!

Tell us how we can improve this post?

Patty Mulder

Patty Mulder is an Dutch expert on Management Skills, Personal Effectiveness and Business Communication. She is also a Content writer, Business Coach and Company Trainer and lives in the Netherlands (Europe). Note: all her articles are written in Dutch and we translated her articles to English!

ALSO INTERESTING

Internal Rate of Return: Definition and Calculation

Investment Management explained

Quick Ratio: Meaning and Formula

Leave a reply cancel reply.

You must be logged in to post a comment.

BOOST YOUR SKILLS

Toolshero supports people worldwide ( 10+ million visitors from 100+ countries ) to empower themselves through an easily accessible and high-quality learning platform for personal and professional development.

By making access to scientific knowledge simple and affordable, self-development becomes attainable for everyone, including you! Join our learning platform and boost your skills with Toolshero.

POPULAR TOPICS

• Change Management
• Marketing Theories
• Problem Solving Theories
• Psychology Theories

ABOUT TOOLSHERO

• Free Toolshero e-book
• Memberships & Pricing

The Capital One Case Interview: Everything You Need to Know

• Last Updated July, 2021

The Skills Capital One Looks for in Candidates

A capital one case example, what the capital one interview process looks like, 7 tips on how to prepare for the capital one case interview, how capital one cases differ from traditional strategy consulting cases, frequently asked fit interview questions.

Capital One is a pretty unique company: it’s a bank, with a culture that’s more like a tech or data firm. And therefore, the Capital One case interview is also pretty unique.

If you’re interviewing with consulting firms, you’ll recognize the overall format of a Capital One case interview. It is structured more like a strategy consulting case (and not like a typical bank interview). 

BUT the Capital One case interview contains more math, and often requires some knowledge of financial products.

Don’t worry! We can tell you what to expect and how to prepare.

In this article, we’ll discuss:

• The skills Capital One looks for in candidates,
• What their interview process looks like,
• How their cases differ from traditional strategy consulting cases,
• A Capital One case example,
• 7 tips on how to prepare, and
• A list of frequently asked fit interview questions.

Let’s get started!

In your Capital One Case interview, the interviewer will assess you on problem-solving, fluency on business concepts, communication skills, and especially, quantitative skills.

Just like other case interviews, in the Capital One case interview, you want to demonstrate how you think. 

You will have to be structured and organized, and communicate clearly throughout the case. To review some of the basics of how to ace the case interview, you should check out Our Ultimate Guide to Case Interview Prep .

While the Capital One case interview resembles a typical case interview, it will be focused mainly on assessing your quantitative capabilities. Capital One is very data intensive, and they want to bring on employees who are excited to solve problems using math. 

In other words, Capital One wants to hire people who are fluent in making data-driven decisions. So during your Capital One case interview, you’ll want to demonstrate that you are very comfortable with math. 

There’s a big difference between forcing your way through a tough math problem and dare I say… enjoying it. 

You’ll want to feel super confident in your skills and your Capital One case prep. So even if you get tripped up or stumble during the case, you should look at the Capital One case interview as a puzzle to solve rather than the oral-math-test-that-ruins-your-life-and-disappoints-grandma.

One of our consultant advisors who gave input on this article shared this example: 

“ I got a “D” on my first finance mid-term in undergrad. I was so mad that I became a finance major and got a job in finance at a bank after college. I used to struggle with using new financial concepts, but now I have a great skillset to wrangle financial, marketing, and data challenges.”

You’ll want to display that kind of playful grit as you work through the Capital One case interview. They are meant to be tough and put people on their toes. 

We’ll talk more about how the Capital One case is different and outline a sample case below. 

Before we get to the details, we want to emphasize that you can practice your way to being prepared for this kind of math-heavy case .

In a Capital One case interview, the interviewer will also assess your communication skills based on your ability to:

• Drive the discussion
• Communicate complex ideas in simple terms

Driving the discussion

In the Capital One case interview, the interviewer wants you to play the role of a business owner as opposed to a consultant. This small change shifts the dynamic to you to drive the conversation. 

DON’T be thrown by the fact that your interviewer is not offering up clear next steps or sometimes withholds key information. 

DO get comfortable with asking questions when you need to know more. 

DO practice transitions so you can smoothly flow from each small conclusion to the next topic. 

To help with transitions, you can use something like the phrase “Well now that we’ve concluded X, I’d like to get a better understanding of Y.”

Communicating Complex Ideas in Simple Terms

You will likely need to be able to explain difficult concepts to someone who is (pretending) not to be an expert on the subject. 

Be prepared to break your analysis down into simple, logical steps, and walk your interviewer through what you’re doing. Communicating about your analytical approach is often more important than getting the math right. 

Do take good notes during the interview, especially on data you may need for calculations.

DO use structured thinking to outline how you want to analyze the problem and to ask questions about the data points you need to make decisions. 

DON’T dive into a calculation before you’ve walked your interviewer through your analytical structure. 

We’ve heard many stories of consultants who outlined their logic, flubbed the math a little, made a correction, adapted their answer, moved on to the recommendation, and got an offer.

Your ability to adjust your approach based on feedback is important, so if you’re able to quickly understand your error, you will probably get a pass on a simple math mistake if you were able to outline the correct logic and keep moving through the case without getting flustered. 

Now that we’ve reviewed what Capital One is looking for, let’s review their overall interview process. 

Overall the Capital One interview process looks similar to other firms. 

If you’re recruiting on-campus for various analyst roles, the process typically looks like this: 

• Resume drop (no cover letter)
• First round of interviews (2 interviews – case and behavioral)
• Final round of interviews (4 interviews – case, product, and behavioral)

Try to finish working through your case with enough time left for a few fit questions, and for your questions for the interviewer. 

If you’re applying from a school that doesn’t have a formal Capital One recruiting program, or as an experienced hire, there may be some additional elements to your application and interview process including: 

• A cover letter, and
• An online assessment.

Now that you’ve got the basics on the interview process, let’s talk about how the Capital One case interview is different from other interviews you’ve done!

Nail the case & fit interview with strategies from former MBB Interviewers that have helped 89.6% of our clients pass the case interview.

The Capital One case interview demands more from candidates than a typical case interview. Here’s an overview of the main differences: 

• The Capital One case interview is very math-heavy.
• You can use a calculator!
• There is less focus on working with clients.
• You should be prepared to drive the case with a “business owner” mindset.
• There may be more than one right answer to the overall case.
• There may be cases about financial products.

The Capital One Case Interview Is Very Math-heavy

Capital One is looking to get a clear assessment of your data-driven decision-making capabilities. 

What does that even mean? 

In the Capital One case interview, you will cover fewer ambiguous concepts than in other case interviews. In a typical management consulting case interview, a smart, organized, great communicator who happens to be weak on math could ‘logic’ their way to some pretty solid recommendations. 

That’s not possible in the Capital One case interview.

A Capital One Case interview will have multiple discrete math problems. They often involve Algebra. Remember solving for “X”? Me neither. But you should revisit basic algebra and how to solve for unknown variables. 

There will be right answers to each of those problems, and they should steer you towards a final recommendation.

Capital One Cases Often Involve Break-even Analysis

The most frequent type of math problem in a Capital One case interview is a break even analysis. What the interviewer is often looking for is a recommendation on whether a particular strategy and investment will be ‘worth it’ for the company. 

In order to determine whether an investment meets the client’s expectations, it’s a good idea to ask your interviewer what their goals are. Example: would they be happy with a 3-year payback timeline? Or would a profit margin of 25% meet their expectations?

One of the most frequent types of break-even analysis is the time to break even. Here’s a sample formula. 

      Break-even:  Investment cost / annual profit = years to break even 

A break-even case might be structured likes this: 

• Evaluate a new strategy for a company (e.g., the firm is launching a new product, changing pricing, etc.)
• Assess the cost of this new strategy (both upfront and changes to ongoing costs).
• Assess the impact to revenue over time,
• Calculate the impact to profit (note how much higher profits will be once we hit a steady-state).
• Estimate the break-even time.
• Make a recommendation on whether the effort seems ‘worth it’. 

The recommendation you make may be subjective based on your experience, here’s a few examples: 

• Break-even is two years, and profits increase 2%.
• Break-even is two years, and profits increase 10%.
• Break-even is ten years, and profits increase 20%.
• Break-even is ten years, and profits increase 5%.

If you’ve asked your interviewer about the client’s profitability expectations, use their answer to determine whether the project meets them. If the interviewer does not provide concrete expectations, you will have to use your business judgment. 

For my money, options B and C appear worth it. Options A and D take too long or yield too little of a return in general.

Capital One Cases Are Sometimes Missing Essential Data

Another tricky element that may pop up in a Capital One case interview is that some essential data may be missing. 

If this happens in your case, DON’T FREAK OUT! 

You will have to make some basic assumptions using your business knowledge and simple logic. 

For example, you may want to calculate expected pricing over the next two years to estimate revenue. BUT your interviewer may not have that data. 

What would you do? You can make assumptions. 

Talk your interviewer through your assumptions. Here’s some ideas for the example above: 

• Use the typical cost-of-living figures to grow pricing (e.g. 3%),
• Use high and low scenarios to create boundaries for pricing over the next few years.

The idea of using high and low scenarios to test the financial impact of a financial decision is actually very common. It’s often considered overly precise to create a true forecast without detailed financial modelling. 

But it’s very common to start with low and high expected outcomes and narrow in from there as you get more data throughout the case.

You Can Use a Calculator!

It may feel overwhelming to use scenarios during a case interview, but another variation of the Capital One case interview is that you can use a calculator. 

So organize the math on the page and tap tap tap away at those scenarios. 

Just like open-book exams, this is a blessing and a curse. 

It’s great to have access to a calculator so you don’t have to worry about long division brain freeze during the Capital One case interview. But it also means that the math problems are slightly harder, and typically require a bunch of small calculations to get to the bigger answer. 

We recommend that you write out the framework for analysis, and then fill in numbers along the way. That way if you make a calculation mistake it’s easier for you or your interviewer to spot it. 

This is actually how teams work together to solve problems on a real case. 

DON’T dive right into a 15-step calculation on your little calculator. 

DO outline the analysis you’re planning to do either verbally or on paper. 

Note: you can only use a simple calculator, so leave the TI-whatever-thousands at home! 

Since you probably don’t use these kinds of calculators often, you may want to practice with them during your prep.

Capital One Interviews Focus Less On Working with Clients...

If you get a role at Capital One, you likely won’t be working directly with any external clients. Instead, you’ll be helping to run a piece of their business like a credit card line.

So the Capital One case interview is typically structured as if you are a business owner. 

DON’T refer to giving options to the client, asking the client, etc.

… So Be Prepared to Drive the Case with a ‘Business Owner’ Mindset

In the Capital One case interview, the interviewer is typically looking for you to drive the discussion as a business owner. 

The interviewer will describe a business dilemma and then let you lead the rest of the discussion. You should aim to: 

• Outline how you would approach the problem.
• Propose the analysis you will do.
• Request the information you need.
• Weigh available options.
• Make a recommendation and support it using the insights you’ve gathered throughout the case. 

This expectation is similar to Bain or BCG’s interviewee-led case interview. It’s basically the opposite of a McKinsey case where they walk you through specific questions and provide specific prompts. 

Your interviewer might actually leave you hanging without some data, to see if you can reason out what you need and make reasonable estimates. 

This interview format requires you to take a more assertive tack on how you’re going to navigate the interview. Have a lot of confidence in the path you want to pursue and really “own” it. 

DON’T wait for the interviewer to spoon feed you questions. 

DO think of yourself as a business leader. What would YOU do if given the information in the case?

There May Be More Than One Right Answer to a Capital One Case

O.K., so this is true with any case, but it might be more true with the Capital One case interview. 

There could be a few possible good answers based on the discussion you’ve had and the information you’ve received. That’s true with any project you might work on. There could be multiple options that work. 

You will still have to choose the path you believe in most. 

So be prepared to highlight multiple paths to pursue, pros and cons of each path, and why you chose your recommended path.  

Capital One Cases Are Sometimes About Financial Products

Most candidates also have multiple Capital One case interviews, so you’re highly likely to have at least one case that involves financial products. 

To be fair, you could go into a Capital One case interview with zero knowledge about financial products and if you ask the right questions you’ll be fine. 

But why risk it? 

You don’t need to become an expert in financial products overnight, but do yourself (and your interviewers) a favor: do some homework. 

Spend a few hours learning about financial products like credit cards, savings and checking accounts, and how companies like Capital One make money from offering those products. Also, read up on other financial companies like Venmo and PayPal make money, so you understand competitive threats to Capital One’s products. Investopedia is a good source for this.

The Bottom Line:

Do lots of practice cases and become fluent in the Capital One case. Let’s practice now!

For this case, let’s say your interviewer tells you that you’re a Senior Pricing Director at Paper Mill Plus, a producer of basic white copy paper. Paper Mill Plus sells to various paper distributors and retailers across the country. You’ve been asked to explore price reduction strategies that will boost sales by 10%.

You’ll want to outline all the elements you need to make a recommendation. In this example, we’re going to dig deep into the Annual Sales number until we get to average pricing. 

• Annual Sales = # of Customers X Average Annual Customer Spend
• Average Annual Customer Spend = Monthly Customer Spend X 12
• Monthly Customer Spend = Cases of Paper / Month * Average Annual Price per Case

Now we’ve got a logical outline of the dimensions we’ll need for our analysis. Let’s get one step closer to the answer by mapping out how we’ll estimate the growth needed: 

• Annual Sales x 1.1 = Sales growth of 10% or Targeted Annual Sales

We’re ultimately going to use the Targeted Annual Sales number to back into our recommended strategy. 

You can ask your interviewer for any of the above data points. In this example, they provided you with the following: 

• Annual Sales = $100,000,000,
• The cost to the customer of a case of paper is $30, and
• Paper Mill Plus has 1,000 customers.

From here, we’re going to have to back into a few numbers. Let’s start with firming up the Targeted Annual Sales number. 

Therefore, our new pricing strategy would have to bring in about $110 million in annual sales in order to hit our goal. 

We’ve got the price per case, but the interviewer did not share volumes. Let’s dig deeper into the current state to determine the current volume of paper sales. 

Now we can calculate the average number of cases per customer. 

* Note: if you recreate the calculations at home and truncate any decimals, you will calculate slightly different, but directionally correct, numbers. Directionally correct is a term that means it will provide you with the same insight and lead you to the same conclusion. 

So now we know that on average our customers purchase 278 cases per month. But how many cases will they buy if we reduce the price? 

You can ask your interviewer if there’s any research on the impact to the number of cases purchased when they raise or lower the price. 

Your interviewer might be a bit cagey here and say they have no data. 

They do know that most end-users have fairly consistent demand for paper and very limited places to extra store paper, so distributors and retailers don’t like to overstock too heavily. 

Distributors and retailers typically do have some extra storage capacity and they enjoy padding their margins even just a little, so they are likely to buy at least a little more. 

So you’re not going to get hard data from your interviewer and you should make a reasonable assumption. 

The simplest way to do this is to say for every $1 drop in price, customers will buy X more cases. 

The interviewer did not make it sound like your customers are very price sensitive, so it’s best to be conservative with your assumption. You could suggest this assumption to your interviewer like this: 

“Since we don’t know the exact impact that a price reduction has on the cases of paper sold, let’s make an assumption: for every $1 drop in price, on average customers will buy 20 more cases. Are you comfortable with this assumption?” 

Your interviewer will either agree, or nudge you to go higher or lower. 

Our advice is to choose numbers that will allow for simpler math.

Now let’s calculate the new sales number using our estimate for a $1 price drop, which would mean cases per customer per month would rise to 298. 

This is shy of our goal of $110 million, so let’s see if another larger price reduction gets us there. Here we assume a $4 price reduction and an increase in cases per month of 80. 

Recommendation

Great! $111.6 million is greater than our goal of $110 million, so reducing the price per case by $4 is a pricing strategy that could meet our goals as long as on average our customers buy 80 additional cases per month. 

As you discuss this strategy with your interviewer, you should explore the pros, cons, and risks of this strategy. 

There are certainly other issues to consider, such as:  

• How competitors may react to your price drop.
• Will customers over-buy for a few months and then reduce demand because they are overstocked on paper? 
• Will this impact customer buying behavior over the long term? E.g., will they pressure your sales team for more and more deals? 

So while the data indicates there is a path to hitting 10% sales growth, there are risks to review with your interviewer and more than one possible ‘correct’ recommendation. 

This is just a sample analysis to show you how to think through the math for a Capital One case interview, and how it can factor into your final recommendation.

1. Do some homework on financial products.

2. practice break-even cases and mathematical logic., 3. outline the analysis you’re planning to do either verbally or on paper., 4. communicate complex ideas in simple terms., 5. get comfortable with asking questions when you need to know more., 6. practice transitions so you can smoothly flow from each small conclusion to the next topic., 7. drive the discussion as if you are a business owner..

Capital One asks fit or behavioral questions as well as case questions, so prepare for these as well. 

For more insight on how to prepare for the fit part of the interview, check out our article on Fit Interview Questions .  

For a quick intro, here’s our list of the most frequently-asked fit interview questions:

• Tell me about yourself.
• Walk me through your resume.
• Why are you interested in working for Capital One?
• What’s something you’ve worked on outside of school?
• Tell me about a time you dealt with a tough problem.
• Tell me about a time you led others.
• When did you have to convince someone to change their mind on something important to them?
• Tell me about a failure.
• What do you like to do for fun?

Now go find your calculator from third grade, and you should be ready to prep for your Capital One case interview! 

In this article, we’ve covered:

• What Capital One looks for in candidates.
• What the Capital One case interview process is like.
• How Capital One cases differ from typical management consulting cases.
• An example of the type of case used by Capital One.
• 7 tips that will set you up to ace the case.
• The most common fit interview questions.

——————————————————————————————————————-

Still have questions?

If you have more questions about the Capital One case interview, leave them in the comments below. One of My Consulting Offer’s case coaches will answer them.

Other people prepping for the Capital One interview found the following pages helpful:

• Our Ultimate Guide to Case Interview Prep
• Business Situation Framework
• Capital One Online Assessment

Help with Case Study Interview Prep

T hanks for turning to My Consulting Offer for help prepping for your Capital One case interview. My Consulting Offer has helped 89.6% of the people we’ve worked with to get a job in management consulting. We want you to be successful in your consulting interviews too. For example, here is how Julien was able to get his offer from Capital One.

© My CONSULTING Offer

3 Top Strategies to Master the Case Interview in Under a Week

We are sharing our powerful strategies to pass the case interview even if you have no business background, zero casing experience, or only have a week to prepare.

No thanks, I don't want free strategies to get into consulting.

We are excited to invite you to the online event., where should we send you the calendar invite and login information.

3.3 Perform Break-Even Sensitivity Analysis for a Single Product Under Changing Business Situations

Finding the break-even point or the sales necessary to meet a desired profit is very useful to a business, but cost-volume-profit analysis also can be used to conduct a sensitivity analysis , which shows what will happen if the sales price, units sold, variable cost per unit, or fixed costs change. Companies use this type of analysis to consider possible scenarios that assist them in planning.

Link to Learning

Watch this video that shows what happens if one or more of the variables in a break-even analysis is changed to learn more.

The Effects on Break-Even under Changing Business Conditions

Circumstances often change within a company, within an industry, or even within the economy that impact the decision-making of an organization. Sometimes, these effects are sudden and unexpected, for example, if a hurricane destroyed the factory of a company’s major supplier; other times, they occur more slowly, such as when union negotiations affect your labor costs. In either of these situations, costs to the company will be affected. Using CVP analysis, the company can predict how these changes will affect profits.

Changing a Single Variable

To demonstrate the effects of changing any one of these variables, consider Back Door Café, a small coffee shop that roasts its own beans to make espresso drinks and gourmet coffee. They also sell a variety of baked goods and T-shirts with their logo on them. They track their costs carefully and use CVP analysis to make sure that their sales cover their fixed costs and provide a reasonable level of profit for the owners.

Change in Sales Price

The owner of Back Door has one of her employees conduct a survey of the other coffee shops in the area and finds that they are charging $0.75 more for espresso drinks. As a result, the owner wants to determine what would happen to operating income if she increased her price by just $0.50 and sales remained constant, so she performs the following analysis:

The only variable that has changed is the $0.50 increase in the price of their espresso drinks, but the net operating income will increase by $750. Another way to think of this increase in income is that, if the sales price increases by $0.50 per expresso drink and the estimated sales are 1,500 units, then this will result in an increase in overall contribution margin of $750. Moreover, since all of the fixed costs were met by the lower sales price, all of this $750 goes to profit. Again, this is assuming the higher sales price does not decrease the number of units sold. Since the other coffee shops will still be priced higher than Back Door, the owner believes that there will not be a decrease in sales volume.

When making this adjustment to their sales price, Back Door Café is engaging in target pricing , a process in which a company uses market analysis and production information to determine the maximum price customers are willing to pay for a good or service in addition to the markup percentage. If the good can be produced at a cost that allows both the desired profit percentage as well as deliver the good at a price acceptable to the customer, then the company should proceed with the product; otherwise, the company will not achieve its desired profit goals.

Change in Variable Cost

In March, the owner of Back Door receives a letter from her cups supplier informing her that there is a $0.05 price increase due to higher material prices. Assume that the example uses the original $3.75 per unit sales price. The owner wants to know what would happen to net operating income if she absorbs the cost increase, so she performs the following analysis:

She is surprised to see that just a $0.05 increase in variable costs (cups) will reduce her net income by $75. The owner may decide that she is fine with the lower income, but if she wants to maintain her income, she will need to find a new cup supplier, reduce other costs, or pass the price increase on to her customers. Because the increase in the cost of the cups was a variable cost, the impact on net income can be seen by taking the increase in cost per unit, $0.05, and multiplying that by the units expected to be sold, 1,500, to see the impact on the contribution margin, which in this case would be a decrease of $75. This also means a decrease in net income of $75.

Change in Fixed Cost

Back Door Café’s lease is coming up for renewal. The owner calls the landlord to indicate that she wants to renew her lease for another 5 years. The landlord is happy to hear she will continue renting from him but informs her that the rent will increase $225 per month. She is not certain that she can afford an additional $225 per month and tells him she needs to look at her numbers and will call him back. She pulls out her CVP spreadsheet and adjusts her monthly fixed costs upwards by $225. Assume that the example uses the original $3.75 per unit sales price. The results of her analysis of the impact of the rent increase on her annual net income are:

Because the rent increase is a change in a fixed cost, the contribution margin per unit remains the same. However, the break-even point in both units and dollars increase because more units of contribution are needed to cover the $225 monthly increase in fixed costs. If the owner of the Back Door agrees to the increase in rent for the new lease, she will likely look for ways to increase the contribution margin per unit to offset this increase in fixed costs.

In each of the prior examples, only one variable was changed—sales volume, variable costs, or fixed costs. There are some generalizations that can be made regarding how a change in any one of these variables affects the break-even point. These generalizations are summarized in Table 3.1 .

Watch this video that walks through, step by step, how to calculate break even in units and dollars and at a desired profit or sales level to learn more.

Changing Multiple Variables

We have analyzed situations in which one variable changes, but often, more than one change will occur at a time. For example, a company may need to lower its selling price to compete, but they may also be able to lower certain variable costs by switching suppliers.

Suppose Back Door Café has the opportunity to purchase a new espresso machine that will reduce the amount of coffee beans required for an espresso drink by putting the beans under higher pressure. The new machine will cost $15,000, but it will decrease the variable cost per cup by $0.05. The owner wants to see what the effect will be on the net operating income and break-even point if she purchases the new machine. She has arranged financing for the new machine and the monthly payment will increase her fixed costs by $400 per month. When she conducts this analysis, she gets the following results:

Looking at the “what-if” analysis, we see that the contribution margin per unit increases because of the $0.05 reduction in variable cost per unit. As a result, she has a higher total contribution margin available to cover fixed expenses. This is good, because the monthly payment on the espresso machine represents an increased fixed cost. Even though the contribution margin ratio increases, it is not enough to totally offset the increase in fixed costs, and her monthly break-even point has risen from $4,125.00 to $4,687.50. If the new break-even point in units is a realistic number (within the relevant range), then she would decide to purchase the new machine because, once it has been paid for, her break-even point will fall and her net income will rise. Performing this analysis is an effective way for managers and business owners to look into the future, so to speak, and see what impact business decisions will have on their financial position.

Let’s look at another option the owner of the Back Door Café has to consider when making the decision about this new machine. What would happen if she purchased the new machine to realize the variable cost savings and also raised her price by just $0.20? She feels confident that such a small price increase will go virtually unnoticed by her customers but may help her offset the increase in fixed costs. She runs the analysis as follows:

The analysis shows the expected result: an increase in the per-unit contribution margin, a decrease in the break-even point, and an increase in the net operating income. She has changed three variables in her costs—sales price, variable cost, and fixed cost. In fact, the small price increase almost gets her back to the net operating income she realized before the purchase of the new expresso machine.

By now, you should begin to understand why CVP analysis is such a powerful tool. The owner of Back Door Café can run an unlimited number of these what-if scenarios until she meets the financial goals for her company. There are very few tools in managerial accounting as powerful and meaningful as a cost-volume-profit analysis.

Concepts In Practice

Value menus.

In January 2018, McDonald’s brought back its $1 value menu. After discontinuing its popular Dollar Menu six years previously, the new version has a list of items priced not only at $1, but at $2 and $3 as well. How can McDonald’s afford to offer menu items at this discounted price? Volume! Although the margin on each unit is very small, the food chain hopes to make up the difference in quantity. They also hope that consumers will add higher priced (and higher margin) items to their orders. 1 The strategy is not without its risks, however, as rising food or labor costs could put franchisees in a position where the value pricing does not cover their product costs. Rivals Taco Bell and Dunkin’ Donuts have aggressively marketed their value menus, making it almost impossible for McDonald’s to ignore the growing trend among consumers for “value pricing.” Watch this video to see what McDonald’s is offering consumers.

• 1 Zlati Meyer. “McDonald’s Hope Customers Buck Up Thursday to New Dollar Menu.” USA Today. January 3, 2018. https://www.usatoday.com/story/money/2018/01/03/mcdonalds-hopes-customers-buck-up-thursday-new-dollar-menu/996350001/

As an Amazon Associate we earn from qualifying purchases.

This book may not be used in the training of large language models or otherwise be ingested into large language models or generative AI offerings without OpenStax's permission.

Want to cite, share, or modify this book? This book uses the Creative Commons Attribution-NonCommercial-ShareAlike License and you must attribute OpenStax.

Access for free at https://openstax.org/books/principles-managerial-accounting/pages/1-why-it-matters

• Authors: Mitchell Franklin, Patty Graybeal, Dixon Cooper
• Publisher/website: OpenStax
• Book title: Principles of Accounting, Volume 2: Managerial Accounting
• Publication date: Feb 14, 2019
• Location: Houston, Texas
• Book URL: https://openstax.org/books/principles-managerial-accounting/pages/1-why-it-matters
• Section URL: https://openstax.org/books/principles-managerial-accounting/pages/3-3-perform-break-even-sensitivity-analysis-for-a-single-product-under-changing-business-situations

© Dec 13, 2023 OpenStax. Textbook content produced by OpenStax is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike License . The OpenStax name, OpenStax logo, OpenStax book covers, OpenStax CNX name, and OpenStax CNX logo are not subject to the Creative Commons license and may not be reproduced without the prior and express written consent of Rice University.

Break Even Analysis: Definition, Calculation, and Use (2023)

Do you know your company’s break-even point? If not, you can massively improve your chances of business success by sitting down and crunching some numbers.

A break-even analysis can help you determine how much money you need to become profitable. While this may not apply to all businesses, it’s an important tool to help you understand your financial situation, and it can guide you to make better business decisions.

In this article, we’ll dive into what a break-even point analysis is and how you can calculate it, as well as give some examples and some tricks and tips you can apply along the way.

Start selling online now with Shopify

What is a break-even analysis?

Simply put, a break-even analysis is a financial calculation that will help you figure out how much money you need to earn before your business idea officially crosses into “profitable” territory. 

To become profitable, you need to be able to cover your daily costs of production and operation, and then earn some extra on top of that.

→ Click Here to Launch Your Online Business with Shopify

Determining your break-even point is also helpful for companies that require a lot of capital and upfront investment to get up and running, like brick-and-mortar stores and businesses with a lot of equipment.

To do a break-even point analysis, you’ll need to understand two key types of cost: fixed and variable.

• Fixed cost: an expense that’s always the same number every month, no matter how many sales you make (e.g., real estate rent, insurance, business taxes)
• Variable cost: an expense that increases or decreases based on how many sales you make (e.g., production costs like raw materials, payroll for hourly employee labor, credit card processing fees)

Advantages of a break-even analysis

There are plenty of advantages to performing a break-even point analysis. Here are a few:

Smarter pricing. You may discover that your prices simply aren’t enough to cover your costs, despite the other factors that went into choosing those prices. At the end of the day, profitability is always the number one driver.

Full financial understanding. It’s easy to overlook expenses when you have a lot of things to consider. But a break-even analysis is a detailed look at your business, and often uncovers things you’ve been missing.

Precise sales goals. Many businesses learn exactly how many sales they need to make per day, week, month, etc., as opposed to the general goal of as many sales as possible (which can be unhelpful when you’re experiencing financial strain!).

Better business decisions. Sometimes, a new business idea seems like a great path. But once you do the math, you may learn that it’s not wise financially. A break-even analysis can help you choose more financially sound options. 

How to calculate break-even point

A break-even point analysis has a clear formula: your fixed costs divided by your average unit price minus your variable costs.

This may seem confusing, so let’s work through it. 

Essentially, you need to figure out how much profit you make on each unit you sell. For example, a unit can be a candle if you’re a candle maker, a lawn mowing service if you have a landscaping company, or a website package if you have a web development company. 

Once you know your profit per unit, divide that number by your fixed costs (the basic costs to run your business that stay the same every month). 

The leftover profit is your contribution margin ratio. It’s called the contribution margin ratio because this amount contributes sales dollars to your fixed costs. 

Note: You can download a free break-even analysis template from Shopify. The US Small Business Administration (SBA) also offers a free break-even calculator .

Collect your business’s data

Gather every single expense you have as a business, including: 

• Fixed costs: Property rent, insurance, software subscriptions, set labor like your accountant’s monthly retainer fee or your salary-based employee pay, etc.
• Variable costs: Raw materials, payment processing fees, non-fixed labor like hourly employee earnings and commission, delivery costs, product packaging costs, etc.
• Average sales price: Calculate a rough average sales price across all your products and services. If you haven’t set firm prices yet, just make an educated guess and you can tweak it later if the numbers don’t work. 

Don’t let a single expense slip through the cracks. This might include variable costs like a set of branded cocktail napkins for a special catering event, or a promotional gift you’re including with your ecommerce orders. 

Plug in the numbers 

Now it’s time to put those numbers into the spreadsheet. We weren’t exaggerating when we said it’s handy: once you add your figures, it’ll calculate your total fixed costs and variable costs. Once you add your average selling price, the spreadsheet will automatically calculate the final break-even point. 

Your final result will show in cell E3, “Break-Even Units.” That’s how many units you need to sell to hit your break-even point. 

The beauty of this spreadsheet is that you can make as many changes and experiments as you want until you reach a configuration that feels feasible and sound for your business.

Break-even-analysis examples: 4 use cases

There are many scenarios for when it makes sense to do a break-even analysis. Examples include: 

1. Starting a new business

Before implementing a business idea, you’ll want to conduct a break-even analysis. Not only will it help you determine whether your idea is viable, it will push you to be realistic about costs and think through your revenue-generating strategy.

2. Changing your business model

If you’re considering changing your business model—for example, switching from carrying products to printing them on demand —you should perform a break-even analysis. This will help you determine whether your prices need to change in response to the significant changes in your startup costs after adopting the new model. 

3. Developing a new product 

Before committing to a new product, you should do a break-even analysis. This is necessary to determine the variable costs related to the new item and set prices. Even if your fixed costs, like utility bills, stay the same, you should still calculate the break-even point to get an idea of the number of units you’ll need to sell to reach profitability. 

4. Adding a new sales channel

Adding a new sales channel can impact your costs, even if your prices remain unchanged. For instance, if you’ve been selling online and now plan to have a pop-up shop , it’s crucial to ensure that you break even to avoid financial strain that may harm your business. 

The same applies to new online sales channels like shoppable posts on TikTok . If you’re planning any additional costs to promote the channel (such as TikTok ads ), your break-even analysis should account for those expenses.

Tips to lower your break-even point

Does your break-even point seem unattainable or far-fetched? This can make you decide against starting a new business. But instead of forgoing the idea of entrepreneurship, you can make some adjustments to lower your break-even point. 

1. Lower variable costs

Reducing your variable expenses can be challenging, especially for new businesses. However, as you grow, it becomes easier to lower these costs. You can attempt to do so by talking to your suppliers, switching to different suppliers, or improving your production method. For instance, you may find that using packing peanuts instead of bubble wrap can lower your shipping costs for delicate items.

2. Raise your prices 

By increasing your prices, you will require fewer sales to reach breakeven. Each unit sold will bring in a higher profit margin. When considering a price hike, consider what the market will accept and what customers will expect. While you’ll need fewer sales, you still must sell enough. If you charge more, customers may expect improved quality or better customer service.

3. Lower fixed costs

Examine the possibility of reducing your fixed costs. The lower they are, the fewer units you need to sell to break even. For instance, if opening a retail store isn’t financially feasible, consider selling through an online platform . Changes like these can significantly lower your fixed costs and, consequently, your break-even point.

Break even to break through

A break-even point analysis doesn’t take a lot of work—it’s a fairly simple financial calculation that can have huge impacts on your business in the long run.

This tool helps business owners and leaders to have a more solid grasp on a company’s finances. Not only does this help with the immediate goal of becoming profitable as soon as possible, but it also helps to steer business decisions for the entire lifetime of the company.

If you’ve never performed a break-even analysis, it’s never too late. Take an hour or two (or perhaps more, depending on the complexity of your business) to crunch the numbers and see where you are and where you can go.

Want to learn more?

• Small Business Accounting: How to Manage Your Own Books
• Financial Statement: What Is It and Why It Matters
• How to Register a Business in the USA
• 10-Step Formula to Achieve Financial Freedom

How to Get More Followers on Facebook: 20+ Ways (2024)

Learn 20+ strategies to increase your Facebook followers in 2024. Boost engagement and grow your audience with proven t…

Instagram Story Dimensions and Killer Ideas to Up Your Game

Learn proper Instagram Story dimensions, plus tips to create compelling Stories for your business.

300+ Best Instagram Captions to Boost Engagement and Branding

Looking for the best Instagram captions? Here are 300+ ideas you can use for campaigns

Oberlo uses cookies to provide necessary site functionality and improve your experience. By using our website, you agree to our privacy policy.

• Search for:
• Top 10: Best Credit Cards
• What is A Credit Card?
• Overview: Investment Strategies
• Shopping & Luxury
• Society & Lifestyle
• Tax Overview
• List: Investment Strategies

Break-Even Analysis: Definition and How to Calculate and Use It

Table of Contents

Introduction

When it comes to running a business, understanding your break-even point is crucial. It is the point at which your revenue equals your expenses, and you start making a profit. Break-even analysis is a powerful tool that helps business owners make informed decisions about pricing, costs, and profitability. In this article, we will define break-even analysis, explain how to calculate it, and explore its practical applications.

What is Break-Even Analysis?

Break-even analysis is a financial tool that allows businesses to determine the point at which their total revenue equals their total costs. It helps answer the fundamental question: “How much do I need to sell to cover all my expenses?” By understanding the break-even point, businesses can set realistic sales targets, make pricing decisions, and assess the financial viability of their operations.

Calculating the Break-Even Point

To calculate the break-even point, you need to consider two main components: fixed costs and variable costs.

Fixed Costs

Fixed costs are expenses that do not change regardless of the level of production or sales. These costs include rent, salaries, insurance, and utilities. To calculate the break-even point, you need to determine the total fixed costs for a specific period, such as a month or a year.

Variable Costs

Variable costs, on the other hand, are expenses that vary with the level of production or sales. Examples of variable costs include raw materials, direct labor, and sales commissions. To calculate the break-even point, you need to determine the variable cost per unit and the total number of units sold.

Break-Even Point Formula

The break-even point can be calculated using the following formula:

Break-Even Point (in units) = Fixed Costs / (Selling Price per Unit – Variable Cost per Unit)

For example, let's say a company has fixed costs of $10,000 per month, a selling price per unit of $20, and a variable cost per unit of $10. Using the formula, the break-even point would be:

Break-Even Point (in units) = $10,000 / ($20 – $10) = 1,000 units

This means that the company needs to sell 1,000 units to cover all its costs and reach the break-even point.

Using Break-Even Analysis

Break-even analysis provides valuable insights into a business's financial health and helps guide decision-making. Here are some practical applications of break-even analysis:

Pricing Decisions

Break-even analysis can help businesses determine the optimal pricing strategy. By understanding the break-even point, businesses can calculate the minimum price they need to charge to cover costs and make a profit. It also allows them to assess the impact of price changes on profitability. For example, if a business lowers its price, it can calculate how many additional units it needs to sell to maintain the same profit margin.

Cost Control

Break-even analysis helps businesses identify areas where they can reduce costs to reach the break-even point faster. By analyzing their fixed and variable costs, businesses can identify opportunities for cost savings. For example, they may find that renegotiating a lease agreement or finding a more cost-effective supplier can significantly impact their break-even point.

Investment Decisions

Break-even analysis is also useful when making investment decisions. It helps businesses assess the financial viability of a new project or expansion. By calculating the break-even point for the new venture, businesses can determine whether the potential revenue will cover the additional costs. This analysis provides a clear picture of the risks and rewards associated with the investment.

Scenario Planning

Break-even analysis allows businesses to conduct scenario planning and assess the impact of different variables on their profitability. By adjusting the selling price, variable costs, or fixed costs, businesses can simulate different scenarios and evaluate their financial implications. This helps them make informed decisions and develop contingency plans.

Case Study: Break-Even Analysis in Action

Let's consider a case study to illustrate the practical application of break-even analysis. ABC Electronics is a company that manufactures and sells smartphones. They have fixed costs of $100,000 per month, a selling price per unit of $500, and a variable cost per unit of $300.

Using the break-even formula, we can calculate the break-even point:

Break-Even Point (in units) = $100,000 / ($500 – $300) = 500 units

This means that ABC Electronics needs to sell 500 units to cover all its costs and reach the break-even point.

Now, let's assume ABC Electronics sells 800 units in a month. By subtracting the break-even point from the actual units sold, we can calculate the company's profit:

Profit = (Actual Units Sold – Break-Even Point) * (Selling Price per Unit – Variable Cost per Unit)

Profit = (800 – 500) * ($500 – $300) = 300 * $200 = $60,000

In this case, ABC Electronics would make a profit of $60,000.

Break-even analysis is a powerful tool that helps businesses determine the point at which their revenue equals their expenses. By calculating the break-even point, businesses can make informed decisions about pricing, costs, and profitability. It allows them to set realistic sales targets, make pricing decisions, control costs, and assess the financial viability of their operations. Break-even analysis is a valuable tool for businesses of all sizes and industries, providing insights that can drive success and growth.

Leave a Reply Cancel reply

You must be logged in to post a comment.

Username or email address  *

Password  *

Remember me Log in

Lost your password?

To read this content please select one of the options below:

Please note you do not have access to teaching notes, hohner musikinstrumente gmbh & co. kg: break-even analysis.

Publication date: 20 January 2017

Teaching notes

This exercise is one in a series intended to help students learn how to perform financial calculations in marketing contexts.

Helmut Schmidt, product manager for Hohner Musikinstrumente GmbH & Co. KG, the world's foremost manufacturer of harmonicas, accordions, melodicas, and ukuleles, was sitting at his desk reviewing his first assignment from the company's senior executive team. Schmidt had been asked to calculate the break-even point for the company's flagship product, the Marine Band harmonica, under a number of different scenarios.

Calculate unit contribution and margin

Calculate break-even units and market share

• Financial Analysis
• Financial Planning
• Marketing Planning

Hennessy, J. and Meagher, E. (2017), "Hohner Musikinstrumente GmbH & Co. KG: Break-Even Analysis", . https://doi.org/10.1108/case.kellogg.2016.000151

Kellogg School of Management

Copyright © 2012, The Kellogg School of Management at Northwestern University

You do not currently have access to these teaching notes. Teaching notes are available for teaching faculty at subscribing institutions. Teaching notes accompany case studies with suggested learning objectives, classroom methods and potential assignment questions. They support dynamic classroom discussion to help develop student's analytical skills.

Related articles

We’re listening — tell us what you think, something didn’t work….

Report bugs here

All feedback is valuable

Please share your general feedback

Join us on our journey

Platform update page.

Visit emeraldpublishing.com/platformupdate to discover the latest news and updates

Questions & More Information

Answers to the most commonly asked questions here

BROWSE BY TOPICS

• Income Tax e-Filing
• Last Date To File ITR For 2022-23
• Income Tax Slabs FY 2023-24
• Which Is Better: Old vs New Tax Regime For Salaried Employees?
• House Property
• Business, Professional &amp; Freelance
• Which ITR Should I File?
• Income Tax Refunds
• Paying Tax Due
• Salary Income
• Capital Gains Income
• Other income sources
• Advance Tax
• Income Tax Notices

Break-Even Analysis – Definition, Formula & Examples

Updated on : Mar 18th, 2021

A break-even analysis is a financial tool which helps a company to determine the stage at which the company, or a new service or a product, will be profitable. In other words, it is a financial calculation for determining the number of products or services a company should sell or provide to cover its costs (particularly fixed costs). 

What is a Break-Even Analysis

Break-even is a situation where an organisation is neither making money nor losing money, but all the costs have been covered.

Break-even analysis is useful in studying the relation between the variable cost, fixed cost and revenue. Generally, a company with low fixed costs will have a low break-even point of sale. For example, say Happy Ltd has fixed costs of Rs. 10,000 vs Sad Ltd has fixed costs of Rs. 1,00,000 selling similar products, Happy Ltd will be able to break-even with the sale of lesser products as compared to Sad Ltd.

Components of Break-Even Analysis

Fixed costs Fixed costs are also called overhead costs. These overhead costs occur after the decision to start an economic activity is taken and these costs are directly related to the level of production, but not the quantity of production. Fixed costs include (but are not limited to) interest, taxes, salaries, rent, depreciation costs, labour costs, energy costs etc. These costs are fixed irrespective of the production. In case of no production also the costs must be incurred.

Variable costs Variable costs are costs that will increase or decrease in direct relation to the production volume. These costs include cost of raw material, packaging cost, fuel and other costs that are directly related to the production.

Calculation of Break-Even Analysis

The basic formula for break-even analysis is derived by dividing the total fixed costs of production by the contribution per unit (price per unit less the variable costs).

For an example: Variable costs per unit: Rs. 400 Sale price per unit: Rs. 600 Desired profits: Rs. 4,00,000 Total fixed costs: Rs. 10,00,000 First we need to calculate the break-even point per unit, so we will divide the Rs.10,00,000 of fixed costs by the Rs. 200 which is the contribution per unit (Rs. 600 – Rs. 200). Break-Even Point = Rs. 10,00,000/ Rs. 200 = 5000 units Next, this number of units can be shown in rupees by multiplying the 5,000 units with the selling price of Rs. 600 per unit. We get Break-Even Sales at 5000 units x Rs. 600 = Rs. 30,00,000. (Break-even point in rupees)

Contribution Margin

Break-even analysis also deals with the contribution margin of a product. The excess between the selling price and total variable costs is known as contribution margin. For an example, if the price of a product is Rs.100, total variable costs are Rs. 60 per product and fixed cost is Rs. 25 per product, the contribution margin of the product is Rs. 40 (Rs. 100 – Rs. 60). This Rs. 40 represents the revenue collected to cover the fixed costs. In the calculation of the contribution margin, fixed costs are not considered.

When is Break-even analysis used

• Starting a new business:  To start a new business, a break-even analysis is a must. Not only it helps in deciding whether the idea of starting a new business is viable, but it will force the startup to be realistic about the costs, as well as provide a basis for the pricing strategy.
• Creating a new product:  In the case of an existing business, the company should still peform a break-even analysis before launching a new product—particularly if such a product is going to add a significant expenditure.
• Changing the business model:  If the company is about to the change the business model, like, switching from wholesale business to retail business, then a break-even analysis must be performed. The costs could change considerably and breakeven analysis will help in setting the selling price.

Breakeven analysis is useful for the following reasons:

• It helps to determine remaining/unused capacity of the company once the breakeven is reached. This will help to show the maximum profit on a particular product/service that can be generated.
• It helps to determine the impact on profit on changing to automation from manual (a fixed cost replaces a variable cost).
• It helps to determine the change in profits if the price of a product is altered.
• It helps to determine the amount of losses that could be sustained if there is a sales downturn.

Additionally, break-even analysis is very useful for knowing the overall ability of a business to generate a profit. In the case of a company whose breakeven point is near to the maximum sales level, this signifies that it is nearly impractical for the business to earn a profit even under the best of circumstances. Therefore, it’s the management responsibility to monitor the breakeven point constantly. This monitoring certainly reduces the breakeven point whenever possible.

Ways to monitor Break-even point

• Pricing analysis:  Minimize or eliminate the use of coupons or other price reductions offers, since such promotional strategies increase the breakeven point.
• Technology analysis:  Implementing any technology that can enhance the business efficiency, thus increasing capacity with no extra cost.
• Cost analysis:  Reviewing all fixed costs constantly to verify if any can be eliminated can surely help. Also, review the total variable costs to see if they can be eliminated. This analysis will increase the margin and reduce the breakeven point.
• Margin analysis:  Push sales of the highest-margin (high contribution earning) items and pay close attention to product margins, thus reducing the breakeven point.
• Outsourcing:  If an activity consists of a fixed cost, try to outsource such activity (whenever possible), which reduces the breakeven point.

Benefits of Break-even analysis

• Catch missing expenses:  When you’re thinking about a new business, it’s very much possible that you may forget about a few expenses. Therefore, a break-even analysis can help you to review all financial commitments to figure out your break-even point. This analysis certainly restricts the number of surprises down the road or atleast prepares a company for them.
• Set revenue targets:  Once the break-even analysis is complete, you will get to know how much you need to sell to be profitable. This will help you and your sales team to set more concrete sales goals.
• Make smarter decisions:  Entrepreneurs often take decisions in relation to their business based on emotion. Emotion is important i.e. how you feel, though it’s not enough. In order to be a successful entrepreneur, decisions should be based on facts.
• Fund your business:  This analysis is a key component in any business plan. It’s generally a requirement if you want outsiders to fund your business. In order to fund your business, you have to prove that your plan is viable. Furthermore, if the analysis looks good, you will be comfortable enough to take the burden of various ways of financing.
• Better pricing: Finding the break-even point will help in pricing the products better. This tool is highly used for providing the best price of a product that can fetch maximum profit without increasing the existing price.
• Cover fixed costs:  Doing a break-even analysis helps in covering all fixed cost.

Clear offers taxation & financial solutions to individuals, businesses, organizations & chartered accountants in India. Clear serves 1.5+ Million happy customers, 20000+ CAs & tax experts & 10000+ businesses across India.

Efiling Income Tax Returns(ITR) is made easy with Clear platform. Just upload your form 16, claim your deductions and get your acknowledgment number online. You can efile income tax return on your income from salary, house property, capital gains, business & profession and income from other sources. Further you can also file TDS returns, generate Form-16, use our Tax Calculator software, claim HRA, check refund status and generate rent receipts for Income Tax Filing.

CAs, experts and businesses can get GST ready with Clear GST software & certification course. Our GST Software helps CAs, tax experts & business to manage returns & invoices in an easy manner. Our Goods & Services Tax course includes tutorial videos, guides and expert assistance to help you in mastering Goods and Services Tax. Clear can also help you in getting your business registered for Goods & Services Tax Law.

Save taxes with Clear by investing in tax saving mutual funds (ELSS) online. Our experts suggest the best funds and you can get high returns by investing directly or through SIP. Download Black by ClearTax App to file returns from your mobile phone.

Cleartax is a product by Defmacro Software Pvt. Ltd.

Company Policy Terms of use

Data Center

SSL Certified Site

128-bit encryption

• Free Case Studies
• Business Essays

Write My Case Study

Buy Case Study

Case Study Help

• Case Study For Sale
• Case Study Service
• Hire Writer

Breakeven Analysis

BREAK EVEN ANALYSIS Break-even is the point at which a product or service stops costing money to produce and sell, and starts generating a profit for your business.

This means sales have reached sufficient volume to cover the variable and fixed costs of producing and distributing your product. [Type the document subtitle] KOMAL BHILARE ROLL NO: 85 2013 DEFINITION Break Even is: •the sales point at which the Company neither makes profit nor suffers loss, or  •sales level where fixed cost are fully absorbed by or  •the level where contribution margin equals the fixed cost.

We Will Write a Custom Case Study Specifically For You For Only $13.90/page!

Breakeven analysis provides data for • profit planning • policy formulating and •decision making Break-even analysis may be based on: •historical data, •past operations, or •future sales and costs, Depending on management’s need and desire. •The break even analyses technique is used in various business decision making areas, as this help in knowing the minimum desired level to be achieved to avoid loss situation. •The Breakeven analysis is mostly used at the time of investing in new project and introducing new products.

The organizer of this workshop must have seen Break even for this workshop. USE OF BREAK EVENANALYSES ? Hospital or Hotel management would like to know sales point in terms of number of beds/ rooms, to recover fixed cost to reach at a breakeven point. ?The school owner would be interested in knowing minimum number of students to be admitted to reach at breakeven ?New branch of bank would need to know minimum deposits from customer ?On introduction of new products certain huge sales promotional expenses are planned in order to achieve planned sales. The management while deciding about approving expenditures would be interested to see cost / benefit analyses or minimum expected sales (break even) to be achieved to recover these expenses (disregarding the very ambitious sales budgets submitted by the sales and marketing team) FORMULA A) Breakeven point of output = (fixed cost) / (contribution per unit) Where, Contribution=selling cost – variable cost Fixed cost= Contribution -profit B) Breakeven point of Sales = 1. Fixed price x SP per unit Contribution per unit 2.

Fixed Cost x Total Sales Total Contribution BREAK EVEN GRAPH Uses of Breakeven Chart A breakeven chart can be used to show the effect of changes in any of the following profit factors: • Volume of sales • Variable expenses • Fixed expenses • Selling price PROFIT VOLUME RATIO (P/V RATIO) The ratio of contribution to sales is P/V ratio or C/S ratio.

It is the contribution per rupee of sales and since the fixed cost remains constant in short term period, P/V ratio will also measure the rate of change of profit due to change in volume of sales.

The P/V ratio may be expressed as follows: P/V ratio = Sales – Marginal cost of sales = Contribution Sales Sales = Changes in contribution = Change in profit Changes in sales Change in sales A fundamental property of marginal costing system is that P/V ratio remains constant at different levels of activity. A change in fixed cost does not affect P/V ratio. The concept of P/V ratio helps in determining the following: • Breakeven point Profit at any volume of sales • Sales volume required to earn a desired quantum of profit • Profitability of products • Processes or departments the contribution can be increased by increasing the sales price or by reduction of variable costs. MARGINAL COST A marginal cost is another term for a variable cost. The term ‘marginal cost’ is usually applied to the variable cost of a unit of product or service, whereas the term ‘variable cost’ is more commonly applied to resource costs, such as the cost of materials and labour hours.

Marginal costing is a form of management accounting based on the distinction between: a. the marginal costs of making selling goods or services, and b. fixed costs, which should be the same for a given period of time, regardless of the level of activity in the period. Suppose that a firm makes and sells a single product that has a marginal cost of ? 5 per unit and that sells for ? 9 per unit. For every additional unit of the product that is made and sold, the firm will incur an extra cost of ? 5 and receive income of ? 9.

The net gain will be ? 4 per additional unit.

This net gain per unit, the difference between the sales price per unit and the marginal cost per unit, is called contribution. Contribution is a term meaning ‘making a contribution towards covering fixed costs and making a profit’. Before a firm can make a profit in any period, it must first of all cover its fixed costs. Breakeven is where total sales revenue for a period just covers fixed costs, leaving neither profit nor loss. For every unit sold in excess of the breakeven point, profit will increase by the amount of the contribution per unit LIMITATIONS OF BREAK EVEN ANALYSIS: It is best suited to the analysis of one product at a time.

* It may be difficult to classify a cost as all variable or all fixed; and there may be a tendency to continue to use a break even analysis after the cost and income functions have changed. * Break-even analysis is only a supply side (i. e. costs only) analysis, as it tells you nothing about what sales are actually likely to be for the product at these various prices. * It assumes that fixed costs (FC) are constant.

Although this is true in the short run, an increase in the scale of production is likely to cause fixed costs to rise.

Related posts:

• Study Multiproduct Breakeven Analysis Feb
• Rjet Financial Analysis Task 4
• Kajli Agrawal
• Cvp Analysis
• Case Assignment 2
• Best Buy: Financial Analysis
• Cost Volume Profit Analysis and Costing for the 21st Century

Quick Links

Privacy Policy

Terms and Conditions

Testimonials

Our Services

Case Study Writing Service

Case Studies For Sale

Our Company

Welcome to the world of case studies that can bring you high grades! Here, at ACaseStudy.com, we deliver professionally written papers, and the best grades for you from your professors are guaranteed!

[email protected] 804-506-0782 350 5th Ave, New York, NY 10118, USA

Acasestudy.com © 2007-2019 All rights reserved.

Hi! I'm Anna

Would you like to get a custom case study? How about receiving a customized one?

Haven't Found The Case Study You Want?

For Only $13.90/page

Baltimore bridge collapse: What happened and what is the death toll?

What is the death toll, when did the baltimore bridge collapse, why did the bridge collapse, who will pay for the damage and how much will the bridge cost.

HOW LONG WILL IT TAKE TO REBUILD THE BRIDGE?

What ship hit the baltimore bridge, what do we know about the bridge that collapsed.

HOW WILL THE BRIDGE COLLAPSE IMPACT THE BALTIMORE PORT?

Get weekly news and analysis on the U.S. elections and how it matters to the world with the newsletter On the Campaign Trail. Sign up here.

Writing by Lisa Shumaker; Editing by Daniel Wallis and Bill Berkrot

Our Standards: The Thomson Reuters Trust Principles. , opens new tab

Thomson Reuters

Lisa's journalism career spans two decades, and she currently serves as the Americas Day Editor for the Global News Desk. She played a pivotal role in tracking the COVID pandemic and leading initiatives in speed, headline writing and multimedia. She has worked closely with the finance and company news teams on major stories, such as the departures of Twitter CEO Jack Dorsey and Amazon’s Jeff Bezos and significant developments at Apple, Alphabet, Facebook and Tesla. Her dedication and hard work have been recognized with the 2010 Desk Editor of the Year award and a Journalist of the Year nomination in 2020. Lisa is passionate about visual and long-form storytelling. She holds a degree in both psychology and journalism from Penn State University.

Faye sworn in as Senegal president, cites 'profound desire for change'

Senegal's once jailed opposition candidate Bassirou Diomaye Faye was sworn in on Tuesday as the West African nation's fifth and youngest president ever, promising to restore stability and bring economic progress.