How break-even analysis works
Break-even analysis splits your costs into two kinds:
- Fixed costs stay the same for the period whether you sell nothing or a lot: rent, salaries, insurance, software subscriptions, loan interest.
- Variable costs come with each unit you sell: materials, packaging, shipping, card processing fees, sales commission.
Each sale brings in the price and uses up the variable cost. What is left over — the contribution margin — goes towards the fixed costs. Once enough units have contributed enough to cover them, you have reached the break-even point; every unit after that adds its contribution to profit.
Enter a target profit to see the sales needed to reach it, and your expected sales to see the margin of safety: how far sales could fall short of the forecast before you make a loss.
Break-even formulas
CM = P − V
Units = F ÷ (P − V)
Sales = F ÷ ((P − V) ÷ P)
Units = (F + T) ÷ (P − V)
MOS = (Q − Units) ÷ Q × 100
- F
- fixed costs for the period
- P
- price per unit
- V
- variable cost per unit
- T
- target profit for the period
- Q
- expected sales in units for the period
You can’t sell part of a unit, so the break-even and target figures are rounded up to the next whole unit. The break-even sales figure is the exact amount of revenue at which profit is zero.
Worked example
A small workshop has $12,000 of fixed costs a month. It sells a product for $45, and each one costs $17.50 in materials and shipping.
- Contribution per unit: $45 − $17.50 = $27.50
- Contribution ratio: $27.50 ÷ $45 = 61.11%
- Break-even: $12,000 ÷ $27.50 = 436.36, rounded up to 437 units a month
- Break-even sales: $12,000 ÷ ($27.50 ÷ $45) = $19,636.36
- For a $5,000 monthly profit: ($12,000 + $5,000) ÷ $27.50 = 618.18, so 619 units
If the workshop expects to sell 600 units, its profit is 600 × $27.50 − $12,000 = $4,500 and its margin of safety is (600 − 436.36) ÷ 600 = 27.27%: sales could drop by about a quarter before it makes a loss.
Moving the break-even point
Three things move the break-even point, and it helps to test each in the calculator:
- Price. A higher price raises the contribution of every unit. In the example, $50 instead of $45 lifts the contribution to $32.50 and lowers break-even from 437 to 370 units.
- Variable cost. A cheaper supplier or lower shipping costs work the same way as a price rise, without asking customers to pay more.
- Fixed costs. Every $1,000 of extra monthly overhead needs 1,000 ÷ 27.50 ≈ 36 more units a month in the example.
Contribution margin is not the same as gross margin: it subtracts only the costs that vary with each sale, and treats everything else as fixed. To set a price for a target gross margin, use the margin calculator.
Limits of a break-even calculation
- One product. With several products, use an average price and variable cost weighted by how many of each you sell; if the mix changes, the break-even point changes too.
- Straight lines. Real costs aren’t perfectly fixed or variable. Bulk discounts, overtime or a bigger workshop at higher volumes all bend the lines.
- Taxes and financing. The profit shown is before income tax. Loan repayments of principal are not costs in this sense, but they still need cash.
- Cash timing. Breaking even on paper doesn’t mean the bank balance is safe if customers pay late or stock must be bought in advance.
The U.S. Small Business Administration presents break-even analysis as a planning estimate for a business plan and for lenders, not a precise accounting figure. Revisit it when your costs or prices change.
Frequently asked questions
How do you calculate the break-even point?
Subtract the variable cost per unit from the price to get the contribution margin, then divide your fixed costs by it. With $12,000 of fixed costs, a $45 price and a $17.50 variable cost, you need $12,000 ÷ $27.50 = 436.36, so 437 units.
How do I find break-even sales in dollars?
Divide fixed costs by the contribution margin ratio, which is the contribution per unit divided by the price. In the example that is $12,000 ÷ ($27.50 ÷ $45) = $19,636.36 of sales, the same as 436.36 units at $45.
What is the margin of safety?
It is how far your expected sales are above the break-even point, as units or as a percentage of expected sales. Expecting 600 units with a break-even of 436.36 gives a margin of safety of 163.64 units, or 27.27%.
Why is there no break-even point when the price is below the variable cost?
If each unit costs more to make and deliver than you sell it for, every sale adds to the loss instead of paying off fixed costs. Selling more only makes it worse, so you need a higher price or lower variable costs first.
Which costs are fixed and which are variable?
Fixed costs stay the same for the period whatever you sell, such as rent, salaries and insurance. Variable costs rise with each unit sold, such as materials, packaging, shipping and payment fees. Some costs are mixed; split them into a fixed base and a per-unit part.
Sources
Last reviewed September 19, 2026