ARS INSIGHTS | BUSINESS BASICS
Break-Even Analysis: Formula, Worked Example and How to Use It
Break-even analysis tells you how many units you must sell, or how much revenue you must earn, before you stop losing money. Every new business, new outlet or new product should pass this test before any money is spent.
Rent, salaries, loan EMI, insurance. They do not change with sales.
Raw material, packaging, delivery. They rise with every unit sold.
What the customer pays for one unit.
The formula
The part in brackets is called the contribution margin. It is the amount each unit contributes towards paying your fixed costs.
Worked example: a small bakery
| Item | Amount |
|---|---|
| Monthly fixed costs (rent, staff, EMI) | 60,000 |
| Selling price per cake | 500 |
| Variable cost per cake | 300 |
| Contribution per cake | 200 |
| Break-even | 60,000 / 200 = 300 cakes a month |
Selling 300 cakes means no profit and no loss. Every cake after the 300th adds 200 to profit. At about 10 cakes a day the bakery breaks even; below that it loses money.
5 ways to lower your break-even point
- Negotiate rent or choose a cheaper location.
- Cut waste and buy material in better lots to reduce variable cost.
- Raise the price after testing what customers will accept.
- Sell higher-margin items alongside the basic one.
- Convert fixed costs to variable costs, for example part-time staff or outsourced delivery.
The mistake most owners make
They guess how many units they will sell. A break-even number only helps if you also know whether enough customers exist at that price in your location. That is what a demand and feasibility study checks before you commit your savings.
ARS Market Research, Chennai, measures real customer demand and local competition. Call or WhatsApp 9789976662 | 9884642837, write to admin@arsmrs.in or visit arsmrs.in.
Related guides
- Feasibility Study Checklist: 40 Points to Check Before You Invest
- Pricing Research: How to Set the Right Price
- Cash Flow Management for Small Business
- Startup and MSME Research
Learn about registered micro, small and medium enterprises at the Ministry of MSME. The example uses made-up figures for illustration.