What is a break-even analysis and what data do you need to perform it?

• A. Analysis to determine sales needed to cover costs; requires fixed costs, price, and variable costs per unit
• B. It only requires the price of the most expensive service
• C. It relies solely on market demand
• D. It measures customer satisfaction

Answer: (A)

A break-even analysis figure out how many units you must sell (or what revenue you must reach) so that total revenue equals total costs, meaning you neither profit nor lose. To perform it you need three key data points: fixed costs (costs that don’t change with output, like rent), the selling price per unit, and the variable cost per unit (costs that change with each unit produced). With those, you can calculate the break-even point in units: fixed costs divided by the contribution margin per unit, where contribution margin is price minus variable cost. In other words, break-even units = fixed costs / (price − variable cost). You can also compute break-even revenue as break-even units times the price, or use the contribution margin ratio (the margin as a percentage of price) to get revenue.

This matters because it shows how price and cost structure together determine how much you must sell to cover all costs. Relying only on the price of a service, or on market demand, or on customer satisfaction doesn’t tell you when expenses are fully covered—those inputs aren’t enough to locate the break-even point.