How to Calculate Break-Even Point (With Examples)
Your break-even point is the number of sales you need to cover all your costs, with nothing left over as profit or loss. The formula is simple: break-even units = fixed costs ÷ (price − variable cost per unit). The bit in brackets is the contribution margin: how much each sale contributes towards your fixed costs once its own direct costs are paid.
Fixed vs variable costs
- Fixed costs don't change with how much you sell: rent, insurance, software, loan repayments, salaries that don't depend on output.
- Variable costs rise with each unit sold: materials, packaging, shipping to customers, payment fees, sales commissions.
Some costs are a bit of both. That's fine; just make a sensible call and be consistent.
A worked example
A small business sells a product for $45. Each one costs $18 in materials, packaging and fees. Monthly fixed costs are $4,500.
- Contribution margin: $45 − $18 = $27 per unit.
- Break-even units: $4,500 ÷ $27 = 166.7, so 167 units a month (always round up).
- Break-even revenue: $4,500 ÷ (27 ÷ 45) = $4,500 ÷ 0.6 = $7,500 a month.
Sale number 168 is where profit starts. The break-even section of the profit margin calculator does these sums for you.
How changes move the number
| Change | Contribution per unit | Break-even units |
|---|---|---|
| Starting point ($45 price, $18 cost) | $27 | 167 |
| Price up to $50 | $32 | 141 |
| Variable cost down to $15 | $30 | 150 |
| Fixed costs up to $5,400 | $27 | 200 |
A $5 price rise cuts the sales you need by about 15%. That's why small price changes can have such a big effect on whether a business is viable, and why discounting is expensive: every sale at a lower price contributes less.
Break-even with a profit target
Want to make $2,000 a month profit, not just break even? Add it to fixed costs:
($4,500 + $2,000) ÷ $27 = 240.7, so 241 units.
This is a useful sanity check when you're planning: is 241 sales a month realistic with your marketing and capacity?
Break-even for a service business
The same idea works with hours. A freelancer with $2,000 of monthly fixed costs (software, insurance, a share of rent) and a $75 hourly rate, where each billed hour costs about $5 in variable costs, needs $2,000 ÷ $70 ≈ 29 billable hours a month just to cover the business before paying themselves. We cover setting the rate itself in how to set your freelance hourly rate.
Limits of break-even analysis
- It assumes price and variable cost stay the same at every volume. In reality, bulk discounts or extra shifts can change them.
- It works best for one product or a stable product mix. With many products, use an average contribution margin weighted by sales.
- It's about profit, not cash. You can be above break-even and still short of cash if customers pay late or stock builds up.
Use it before you launch
Break-even is most useful before you commit: before signing a lease, hiring, or launching a product. If the break-even number looks unrealistic, it's far cheaper to find out on paper. For pricing the product in the first place, see cost-plus pricing and margin vs markup.
Frequently asked questions
What is the formula for break-even point?
Break-even units = fixed costs ÷ (price per unit − variable cost per unit). Break-even revenue = fixed costs ÷ contribution margin ratio.
How do you calculate break-even with a target profit?
Add the target profit to fixed costs, then divide by the contribution margin per unit.
What is contribution margin?
The selling price minus variable cost per unit. It's how much each sale contributes towards fixed costs and profit.
Why should I round break-even units up?
Because you can't sell part of a unit, and rounding down would leave you slightly short of covering your costs.