Business economics
Break-even and operating leverage
Find the volume where profit starts, measure your safety cushion, and see why fixed costs magnify swings.
Learning objectives
- Calculate break-even volume and break-even revenue
- Calculate the margin of safety
- Calculate the degree of operating leverage and use it to predict how profit responds to a change in sales
Before opening a shop, launching a product or signing a lease, every owner and lender asks the same question: how much do we need to sell just to stop losing money? That is the break-even point.
The same cost structure also determines how violently profit swings when sales change. Businesses with high fixed costs, such as airlines, software firms and hotels, see profits surge in good years and collapse in bad ones. That amplification is operating leverage.
Break-even units = Fixed costs ÷ Contribution per unit Break-even revenue = Fixed costs ÷ CM ratio
- Contribution per unit
- price − variable cost per unit
- CM ratio
- contribution per unit ÷ price
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