How to Calculate the Break-Even Point (With a Worked Example)

Before you launch a product, sign a lease or hire an employee, one question matters more than most: how much do I need to sell to stop losing money? The answer is your break-even point. It is easy to calculate, and it makes plans concrete. This guide shows how, and how to use the result.

What break-even means

Your break-even point is the amount of sales at which total revenue equals total costs. Below it you lose money, above it you make a profit. It can be expressed in units sold or in revenue.

Fixed and variable costs

To calculate it you must separate your costs into two groups.

• Fixed costs stay the same however much you sell in a period: rent, salaries, insurance, software subscriptions, loan payments.
• Variable costs change with each unit sold: materials, packaging, shipping, sales commissions, payment processing fees.

Some costs are mixed, such as a utility bill with a fixed connection charge and a usage charge. Split those into their fixed and variable parts.

The formula

Break-even units = fixed costs ÷ (selling price per unit − variable cost per unit)

The bottom part is the contribution margin per unit: the amount each sale contributes towards fixed costs. Break-even revenue is break-even units times the selling price.

A worked example

A small online shop has fixed costs of $5,000 a month. It sells a product for $25 and spends $10 on materials, packaging and fees for each one. The contribution margin is $15 per unit, or 60 percent of the price.

Break-even units = 5,000 ÷ 15 = 333.3, which rounds up to 334 units. Break-even revenue = 334 × $25 = $8,350. The shop needs 334 sales a month before it makes a profit. The 335th sale earns $15 of profit, and so does every one after it.

Setting a profit target

Break-even is where profit is zero. If you want to earn $3,000 a month, add it to the fixed costs in the formula: (5,000 + 3,000) ÷ 15 = 533.3, so you need 534 units. This turns a wish into a sales target you can plan around.

What moves the number

Change one input at a time and see the effect on the same shop.

1. Raise the price to $28. The contribution becomes $18, and break-even falls to 278 units, a 17 percent drop from a 12 percent price rise.
2. Cut the variable cost to $8. The contribution becomes $17 and break-even falls to 295 units.
3. Cut fixed costs to $4,000. Break-even falls to 267 units.

A price rise usually has the biggest effect, but only if customers still buy at the new price. That is why testing prices matters. Cost cuts are more certain but usually smaller.

Margin of safety

Compare your expected sales with break-even. If you expect to sell 500 units and break-even is 334, the margin of safety is 166 units, about a third of expected sales. A large margin means the business can survive a bad month. A small one means a small dip in sales produces a loss.

Where break-even goes wrong

• Wrong costs. Forgetting a cost, such as payment fees or returns, understates break-even.
• Changing prices. Discounts and promotions reduce the average price actually received.
• Step costs. Fixed costs can jump at higher volumes, for example when you need another employee.
• Several products. If the shop sells items with different margins, use a weighted average, or calculate each product separately.
• Optimistic sales forecasts. Base expected sales on data, not hope.

Try it

The Break-Even Calculator takes your fixed costs, price and variable cost, plus an optional profit target, and shows the units and revenue needed, with a chart of revenue against cost and a table of profit at different sales levels. Check your price and margins with the Profit Margin Calculator, see whether an investment pays back with the ROI Calculator, and see what a sale does to your numbers with the Discount Calculator. For the difference between margin and markup, read profit margin vs markup.