- Break-even units = fixed costs ÷ (price per unit - variable cost per unit).
- Break-even revenue = fixed costs ÷ contribution margin ratio.
- Add a target profit to fixed costs to find the sales needed to reach it.
- The model assumes steady prices and costs, so treat the result as an estimate.
Fixed costs and variable costs
Break-even analysis starts by sorting every cost into one of two groups.
Fixed costs stay the same no matter how much you sell in the period. Rent, salaries, insurance, software subscriptions and loan payments are common examples. You pay them even in a month with zero sales.
Variable costs rise and fall with each unit sold. Materials, packaging, shipping, sales commissions and payment processing fees are typical. Sell twice as many units and these costs roughly double.
Some costs are mixed. A phone plan with a base fee plus usage charges has a fixed part and a variable part. Split these as well as you can. A rough split is better than leaving the cost out.
Contribution margin: the key number
The contribution margin is what is left from each sale after paying the variable cost of that sale. It is the amount each unit contributes toward covering fixed costs and, after that, toward profit.
- Contribution margin per unit = selling price per unit - variable cost per unit
- Contribution margin ratio = contribution margin per unit ÷ selling price per unit
If a product sells for $25 and costs $10 in materials and shipping, the contribution margin is $15 per unit. The ratio is $15 ÷ $25 = 0.60, or 60%. That means 60 cents of every sales dollar is available to cover fixed costs.
Contribution margin is not the same as profit margin. It ignores fixed costs on purpose. See the profit margin calculator for margins that include all costs.
The break-even formulas
There are two versions of the formula. Use the one that fits how you track sales.
Break-even point in units = fixed costs ÷ contribution margin per unit
Break-even point in revenue = fixed costs ÷ contribution margin ratio
The units formula works best when you sell one product or a few similar ones. The revenue formula is easier for a business with many products or services, because it only needs total sales and an average contribution margin ratio.
Both formulas give the same answer. Break-even units multiplied by the selling price equals break-even revenue. The break-even calculator runs both at once.
Worked example
A small business sells candles. Its monthly numbers look like this:
- Fixed costs: $6,000 per month
- Selling price: $25 per candle
- Variable cost: $10 per candle
Contribution margin per unit = $25 - $10 = $15.
Break-even units = $6,000 ÷ $15 = 400 candles.
Contribution margin ratio = $15 ÷ $25 = 60%.
Break-even revenue = $6,000 ÷ 0.60 = $10,000. As a check, 400 candles × $25 = $10,000.
The table shows what happens below, at and above the break-even point.
| Units sold | Revenue | Variable costs | Fixed costs | Profit or loss |
|---|---|---|---|---|
| 200 | $5,000 | $2,000 | $6,000 | -$3,000 |
| 400 | $10,000 | $4,000 | $6,000 | $0 |
| 600 | $15,000 | $6,000 | $6,000 | $3,000 |
Notice the pattern. Each candle sold above 400 adds exactly $15 of profit, and each candle short of 400 adds $15 of loss.
Break-even with a target profit
Breaking even is a minimum, not a goal. To find the sales needed to earn a specific profit, add that profit to fixed costs before dividing.
Units for target profit = (fixed costs + target profit) ÷ contribution margin per unit
Suppose the candle business wants $3,000 of profit each month:
($6,000 + $3,000) ÷ $15 = 600 candles, or $15,000 in revenue.
A related measure is the margin of safety. It shows how far sales can fall before the business starts losing money. At 500 candles a month, the margin of safety is (500 - 400) ÷ 500 = 20%. Sales could drop by 20% before profit reaches zero.
Three ways to lower your break-even point
The formula has only three inputs, so there are only three levers.
- Raise the price. At $30 per candle, the contribution margin becomes $20 and break-even falls to $6,000 ÷ $20 = 300 units. This only helps if demand holds up.
- Cut variable costs. At $8 per candle in variable cost, the contribution margin is $17 and break-even falls to about 353 units.
- Cut fixed costs. At $4,500 in fixed costs, break-even falls to $4,500 ÷ $15 = 300 units.
Try each change on its own to see which one moves the result most. Price changes usually have the largest effect because the whole increase goes straight to contribution margin. To see how pricing connects to cost, read margin vs markup.
Limits of the break-even model
Break-even analysis is a simple planning tool. It rests on assumptions that rarely hold exactly.
- Prices stay constant. In practice, discounts and volume deals lower the average price.
- Variable cost per unit stays constant. Bulk buying can lower it. Overtime and rush orders can raise it.
- Fixed costs stay fixed. They often jump in steps, for example when you need a second location or another employee.
- The sales mix stays the same. With several products, a shift toward low-margin items raises the break-even point.
- Everything made is sold. Unsold inventory ties up cash that the model does not show.
The model also ignores timing. A business can be past break-even on paper and still run short of cash if customers pay late. Pair it with a check of working capital, and use the payback period calculator to see how long an upfront investment takes to recover.
Try it with your own numbers
- Break-Even CalculatorUnits and revenue needed to cover costs.
- Profit Margin CalculatorGross and net margin from revenue and costs.
- Markup CalculatorSelling price and margin from cost and markup.
- Payback Period CalculatorYears until an investment pays for itself.
Frequently asked questions
What is a good break-even point?
There is no single good number. A lower break-even point means less risk, because the business needs fewer sales to cover its costs. Compare your break-even sales with realistic expected sales. If you expect to sell well above the break-even level, you have a cushion. If the two numbers are close, small setbacks can cause losses.
How do I calculate break-even for a service business?
Use the revenue version of the formula. Add up fixed costs for the period, then estimate the share of each sales dollar left after variable costs such as subcontractors, supplies and card fees. Divide fixed costs by that contribution margin ratio. You can also treat one billable hour or one client project as the unit.
What is the difference between break-even point and payback period?
The break-even point is the sales volume in a period where revenue equals total costs. The payback period is the time it takes for cash inflows to recover an upfront investment. One answers how much you need to sell. The other answers how long until the initial money comes back.
How do I find the break-even point with more than one product?
Calculate a weighted average contribution margin based on your expected sales mix. For example, if two products make up 70% and 30% of units sold, weight each contribution margin by those shares and add them. Divide fixed costs by the result. The answer only holds if the sales mix stays close to your assumption.
Sources and further reading
This guide is general education, not financial advice. Rules of thumb vary by lender, industry and country.