How to Calculate Your Business Break-Even Point

Your break-even point is the level of sales at which revenue exactly covers costs, leaving zero profit and zero loss. Knowing it tells you how much you must sell each month before the business starts making money, and how much room you have if sales fall.

The three numbers you need

• Fixed costs: costs that stay roughly the same regardless of sales, such as rent, salaries, insurance and software.
• Selling price per unit: the average price you receive for one product, service or order.
• Variable cost per unit: costs that rise with each sale, such as materials, packaging, shipping and payment fees.

The break-even formula

First calculate the contribution margin per unit: selling price minus variable cost. This is the amount each sale contributes toward fixed costs.

Break-even units = fixed costs ÷ contribution margin per unit

Break-even revenue = break-even units × selling price

Worked example

A business has fixed costs of $12,000 a month. It sells a product for $80, and each unit costs $45 in materials, packaging and fees.

• Contribution margin per unit: $80 − $45 = $35
• Break-even units: $12,000 ÷ $35 = 342.9, rounded up to 343 units
• Break-even revenue: 343 × $80 = $27,440

The business must sell 343 units a month just to cover its costs.

Adding a profit target

To find the sales needed for a specific profit, add the target to fixed costs. For a $3,000 monthly profit: ($12,000 + $3,000) ÷ $35 = 428.6, so 429 units.

Margin of safety

The margin of safety shows how far sales can fall before you reach break-even. If the business expects to sell 450 units: (450 − 343) ÷ 450 = 23.8%. Sales could drop by almost a quarter before the business makes a loss.

Using the contribution margin ratio

Service businesses often do not sell identical units. In that case, use the contribution margin ratio: contribution margin ÷ revenue. If variable costs are 40% of revenue, the ratio is 60%, and break-even revenue is fixed costs ÷ 0.60.

Mistakes that distort break-even

• Leaving out variable costs such as payment processing, shipping or sales commissions.
• Counting loan principal as a fixed cost. It affects cash, not profit, so it belongs in a cash flow forecast instead.
• Using an average price that hides discounts. Use the price customers actually pay.
• Working from unreconciled books, which can put costs in the wrong category or month.

Run your own numbers

Try our free break-even calculator, which calculates units, revenue, profit-target volume and margin of safety, and exports the results to CSV. To see how break-even fits with your overall margins, use the ProfitLeak Profit Health Scanner.

AccoTiva’s management accounting services include contribution margin and break-even analysis built from your reconciled books.