 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 is not a good idea. Break-even can be defined a few different ways, but it always means the same thing. It is the sales level where operating income is zero. Another way to think about it is when contribution margin equals fixed costs, or total revenues equal total expenses. There are three approaches to calculating break-even. The income statement approach, a shortcut approach using the unit contribution margin, and a shortcut approach using contribution margin ratio. This short video will focus on the shortcut approach using contribution margin ratio, and it's a much better way to do break-even analysis than the income statement approach. Here's an example of a contribution margin income statement. The shortcut formula you will want to remember to calculate the sales dollars to break-even is fixed costs plus target income divided by the contribution margin ratio. Remember that to break-even means that operating income is zero. So let's assume the following data. Price is $50, variable cost is $30, therefore our contribution margin per unit is $20, and the fixed costs are $10,000. Using this information, we can calculate that the contribution margin ratio is 40%. So the calculation is 10,000 plus zero divided by 40%. Thus we've calculated that the sales revenue to break-even is $25,000.