 Break-even is an important concept. When starting a business, the first test of reasonableness is how many units need to be sold to break-even. If it's a whole lot, maybe starting the business isn't a good idea. Break-even can be defined a few different ways, but it always means the same thing. It's the sales level where operating income is zero. Another way to think about it is when contribution margin equals our fixed costs, or the total revenues equal total expenses. There are three approaches to calculating break-even. The income statement approach, a shortcut approach using unit contribution margin, and a shortcut approach using contribution margin ratio. This short video will focus on the shortcut approach using unit contribution margin, and it is a much better way to do break-even analysis than the income statement approach you learned earlier. Here is an example of the contribution margin income statement. The shortcut formula you'll want to remember to calculate the units sold to break-even is fixed costs plus target operating income divided by unit contribution margin. Remember that to break-even means that operating income is zero. Let's assume the following. Price is $50, variable cost is $30, therefore our contribution margin is 20, and fixed costs are $10,000. The calculation is $10,000 plus zero divided by $20. Thus, we've calculated in a much faster and easier way that 500 units is needed to be sold in order to break-even.