Break-Even Analysis - How to Calculate your Safe Point [Cheerful cartoon illustration of a spaceship launching into the atmosphere] NARRATOR: When it comes to starting a business, achieving liftoff can be exhilarating. However, it's also when the journey can be the most perilous. [The spaceship launches into the sky and gets stuck in a thick patch of clouds. The engine revs as the ship tries to break through] Narrator:Immediately after launch, the business is working just to stay afloat until the point you know you're in the clear. [The spaceship breaks through the clouds and floats into outer space] Narrator: But what does that mean? And how will you know? It's called break-even. And put simply, it's the point at which a business is neither making a profit nor a loss. Rather, it's momentarily floating in limbo. [The spaceship launches into space and disappears. Text on screen reads “The Break-Even Point” and a coordinate planes appear. The coordinate plane has a y axis labeled “Money” and x axis labeled “Time”. Narrator: The break-even point is the total amount of sales a business needs to achieve before it starts being profitable or, more technically, a business's fixed cost of production, like rent, divided by how much you sell the product for minus the variable costs per unit sold, like ingredients or materials. [An equation appears to the right of the coordinate plane. It reflects what the narrator is saying and reads “Fixed costs divided by (the difference between) Product Price minus Variable Cost equals the Break Even Point (units).] Narrator: How much you sell the product minus variable costs is usually called your contribution margin. [Another equation appears, reflecting what the narrator is saying and reads “Product Price minus Variable cost equals Contribution Margin. The phrase “Contribution Margin” replaces the phrase “Product Price minus Variable Costs” underneath Fixed costs. This means that the first equation that appeared on screen now says Fixed Costs divided by Contribution Margin equals Break-Even Point (units)] Narrator: Confused? Don't worry. Here's an example. Let's say it costs Pizza Planet $8.00 to make one pizza, and they sell the pizza for $12. [Cartoon of pizza ingredients turning into pizza and being sold] Narrator: That means their contribution margin is $4.00. So if Pizza Planet's only fixed cost is $500 rent, to find out the number of pizzas they need to sell to break even, they simply divide the rent by the contribution margin. [The product price is $12, the Variable cost is $8 and the contribution margin is $4.] Narrator: This means they need to sell 125 pizzas. [$500 (their fixed cost) divided by $4 (their contribution margin) equals their Break-Even point which is 125] Narrator: And any pizzas sold after that would contribute to the company's net profit. [The spaceship flies through the sky and onto the coordinate plane which shows a graphical depiction of the break-even point analysis. The coordinate plane shows three lines: The Sales Revenue line, the Total Variable costs line, and the Fixed Costs line. The brea-even point is where the Sales Revenue and Total Variable cost lines intersect] Narrator: So you can see by conducting a break-even analysis, a business is able to determine the price of a product, how many need to be sold, [The lines on the coordinate plane shift around showing that the break-even point changes with a change in price, a change in total variable costs, and a change in fixed costs] Narrator: …as well as identify and potentially reduce excessive fixed costs, ultimately, allowing a business to reach profitability and beyond. [MUSIC PLAYING] [Text on screen reads “Ducere: Global Business School”]