What is the Relationship Between Variable Costs and Break-Even Analysis?
The concept of variable costs is integral to break-even analysis, a financial calculation that helps businesses determine the level of sales needed to cover both fixed and variable costs. By understanding their variable costs, companies can accurately assess the number of units they must sell to achieve profitability. The formula for the break-even point is:
Break-Even Point (Units) = Fixed Costs / (Sales Price per Unit - Variable Cost per Unit)