What is the break-even point?
The break-even point is the sales volume where total revenue exactly covers total costs, so profit is zero. Below it every month runs at a loss; above it each extra sale adds profit. It is usually stated two ways: as a number of units to sell and as an amount of sales dollars.
Break-even formula
Break-even units = Fixed costs ÷ (Price per unit − Variable cost per unit)
Break-even sales = Break-even units × Price per unit = Fixed costs ÷ Contribution margin ratio
Example: a shop has $10,000 a month in fixed costs and sells a product for $50 that costs $30 to make and ship. Each sale contributes $50 − $30 = $20 toward fixed costs. $10,000 ÷ $20 = 500 units a month, or 500 × $50 = $25,000 in sales. That is the default example in the calculator above.
Contribution margin and contribution margin ratio
The contribution margin is what each sale leaves over after its own variable costs: price minus variable cost per unit ($20 in the example). The contribution margin ratio is that amount as a share of the price: $20 ÷ $50 = 40%. Forty cents of every sales dollar goes toward fixed costs and, once they are covered, profit.
Break-even in sales dollars for a service business
If you sell services or many different items, you may not have a single price per unit. Use your contribution margin percentage instead: break-even sales = fixed costs ÷ margin %. A consultancy with $8,000 of monthly fixed costs and a 60% margin breaks even at $8,000 ÷ 0.60 = $13,333 in monthly revenue. Choose Margin % above for this version.
How many units to reach a target profit?
Add the profit you want to the fixed costs: units = (fixed costs + target profit) ÷ contribution margin. To earn $5,000 a month in the example you need ($10,000 + $5,000) ÷ $20 = 750 units, or $37,500 in sales.
Margin of safety
The margin of safety is how far your expected sales are above the break-even point: (expected sales − break-even sales) ÷ expected sales. Selling 600 units against a break-even of 500 gives a margin of safety of 16.7%. Sales could drop by that much before the business starts losing money.
Fixed costs vs variable costs
| Fixed costs (stay the same each month) | Variable costs (rise with each sale) |
|---|---|
| Rent and utilities base charges | Materials and inventory cost |
| Salaries, including your own pay | Packaging and shipping |
| Insurance, software subscriptions | Payment processing and marketplace fees |
| Loan payments, equipment leases | Sales commissions, hourly labor per order |
Some costs are mixed, such as a phone plan with a base fee plus usage. Split them into a fixed part and a per-unit part. Leaving out your own salary is the most common mistake: the business has not really broken even until it pays you too.
How to read a break-even chart
The chart plots dollars against units sold. The fixed cost line is flat. The total cost line starts at the fixed costs and rises by the variable cost of each unit. The revenue line starts at zero and rises by the price of each unit. Where revenue crosses total cost is the break-even point. The gap to the left of it is the loss area and the gap to the right is profit.
Several products: weighted average contribution margin
With more than one product, use a weighted average contribution margin based on your sales mix. If 70% of units are a product with a $20 margin and 30% are one with a $40 margin, the weighted margin is 0.7 × $20 + 0.3 × $40 = $26 per unit, so $10,000 of fixed costs needs about 385 units in that mix. If the mix changes, the break-even point changes with it.
Ways to lower your break-even point
- Raise prices. A $5 increase in the example cuts break-even from 500 to 400 units.
- Cut variable costs per unit, for example by buying in bulk or reducing shipping costs.
- Cut fixed costs, such as moving to a cheaper space or dropping unused subscriptions.
Break-even analysis assumes prices and per-unit costs stay constant at every volume. In practice discounts, bulk pricing and capacity limits bend those lines, so treat the result as a planning estimate and rerun it when your numbers change.