What is Break-Even Point?
The break-even point is the level of sales (in units or in revenue) at which a business’s total revenue exactly equals its total costs (fixed plus variable), yielding neither a profit nor a loss. Sales above the break-even point produce profit; sales below it produce a loss. It is a foundational concept in cost-volume-profit (CVP) analysis.
How It Works
- Identify total fixed costs for the period.
- Compute the contribution margin per unit = selling price – variable cost per unit.
- Break-even units = Fixed Costs / Contribution Margin per unit.
- Break-even revenue = Fixed Costs / Contribution Margin ratio.
- Margin of safety = (Actual Sales – Break-Even Sales) / Actual Sales.
Saudi Context
Saudi entrepreneurs applying for Monsha’at SME funding, Kafalah guarantees, or Saudi Industrial Development Fund loans must present break-even analyses in their business plans. With high commercial rents in Riyadh and Jeddah and Saudization-driven wages, break-even sensitivity to volume drops is a key risk consideration.
Example
A clothing retailer has fixed costs of SAR 80,000 per month. Average gross margin per sale is SAR 40 on a SAR 100 ticket (40% contribution margin). Break-even units = 80,000 / 40 = 2,000 sales per month, or revenue of SAR 200,000.