Break-even Analysis
The break-even point is the production level where your income for a certain number of units produced equals your fixed costs plus the variable costs for that number of units. For instance, you have fixed costs of $500, variable costs of $20 per widget, and you sell the widgets for $25 each, your break-even point is 100 widgets. If you reduce your fixed costs to $400, your break-even point is 80 units. Or if you cut the cost per unit from $20 to $15, your break-even point drops to only 50 widgets.
Money In My Pocket
Any sales beyond the break-even point are profit. In the final example above (fixed cost $500, variable cost $15 each, income $25 each) your break-even point is 50 units. If you produce 50 units and sell 50 units you will break even. Your costs will equal your income. You will have a profit of $0. If you sell less than 50, you will have a loss. If you sell more than 50 you will have a profit.
For example, if you sell 70 units your fixed costs are $500 and your variable costs are $1050 ($15 * 70), so your total costs are $1,550. Your income is $1,750 ($25 * 70) and your profit is $200 ($1,750 - $1,550).
Bottom Line
To make a profit, you must be able to sell each unit for more than it cost to make it AND you must be able to sell it for a price high enough to cover both the variable cost of making it and its share of the fixed costs.
This is true whether you are selling widgets, boxcars of apples, dance lessons, or hours of financial consulting.
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