Break-Even Calculator

What is the break-even point?

The break-even point is the level of sales at which revenue exactly covers all your costs: you neither make nor lose money. Below it the business loses money; above it, every additional sale adds profit.

It can be expressed in units (how many products or services you need to sell) or in sales dollars (how much revenue you need). It's one of the first numbers to work out for a new business and one of the most useful when setting prices.

What each input means

• Monthly fixed costs: what you pay even if you sell nothing, such as rent, salaries, utilities, software and insurance.
• Price per unit: what you charge for each product or service, before sales tax.
• Variable cost per unit: what each unit sold costs you, such as materials, inventory, sales commissions, payment processing and shipping.
• Target profit: optional. The monthly profit you want to earn on top of breaking even.

The difference between price and variable cost is the contribution margin: what each sale contributes toward paying your fixed costs. Divide fixed costs by that margin and you get the units you need to sell.

Break-even formula

Contribution margin = Price − Variable cost per unit
Break-even units = Fixed costs ÷ Contribution margin
Break-even sales = Fixed costs ÷ (Contribution margin ÷ Price)
Units for a profit goal = (Fixed costs + Target profit) ÷ Contribution margin

Units are rounded up: if the exact result is 333.3, you need to sell 334 to avoid a loss.

How to read the results

• Compare break-even units with what you actually sell or can realistically sell. If break-even requires more than the market will buy, you need to raise prices, cut variable costs or reduce fixed costs.
• A low contribution margin ratio makes break-even very sensitive: small cost increases push the required units up sharply.
• If the price is equal to or lower than the variable cost, there is no break-even point: every sale loses money.

If you sell several products, use a weighted average price and variable cost, or calculate break-even sales using your average contribution margin ratio.

Example

A shop has $5,000 in monthly fixed costs, sells each product for $50 and pays $30 per unit. The contribution margin is $20 per unit, so it needs to sell 250 units (or $12,500 in sales) to cover its costs. To earn an extra $2,000 a month, it needs 350 units ($17,500 in sales).

1. Contribution margin: $50 − $30 = $20
2. Contribution margin ratio: $20 ÷ $50 = 40%
3. Break-even units: $5,000 ÷ $20 = 250
4. Break-even sales: $5,000 ÷ 0.40 = $12,500
5. With a $2,000 profit goal: ($5,000 + $2,000) ÷ $20 = 350 units

Common mistakes

• Mixing fixed and variable costs. A salaried employee is a fixed cost; a per-sale commission is a variable cost.
• Leaving your own pay out of fixed costs. If you don't pay yourself, break-even looks easier than it is.
• Using prices that include sales tax. The tax isn't your revenue, so use the pre-tax price.
• Treating break-even as the goal. Breaking even means zero profit; your real target should be above it.