How break-even is calculated
Every sale brings in the price, but part of it goes straight back out as the variable cost of that unit. What is left over, the contribution margin, pays down your fixed costs. You break even when enough sales have contributed enough to cover them.
Contribution margin = price − variable cost per unit
Contribution margin ratio = contribution margin ÷ price × 100
Break-even units = (fixed costs + target profit) ÷ contribution margin
Break-even revenue = break-even units × price
Worked example: a small candle business
Rent, insurance and a part-time helper cost $10,000 a month. Each candle sells for $25 and costs $12 in wax, wick, jar, label and card fees. Each sale contributes $25 − $12 = $13. The break-even point is 10,000 ÷ 13 = 769.23 candles, so the business needs to sell 770 candles a month, about $19,230.77 of revenue, before it makes any money.
Raising the price to $28 lifts the contribution to $16, and break-even drops to 625 candles. A small change in margin moves the break-even point a long way, which is why it is worth checking both the profit margin and the markup on your prices.
Getting the inputs right
- Use the same period for everything. Monthly fixed costs give monthly break-even units.
- Include card processing and marketplace fees in the variable cost if they are charged per sale.
- Include your own pay in fixed costs if the business has to support you. Otherwise "break-even" means you are working for free.
- If you sell several products, use an average price and an average variable cost weighted by how much of each you sell.
The U.S. Small Business Administration's guide to calculating your startup costs walks through the same break-even idea for new businesses.
Questions people ask
What is the break-even point formula?
Break-even units = fixed costs ÷ (price per unit − variable cost per unit). With $10,000 of fixed costs, a $50 price and a $30 variable cost, each sale contributes $20, so you need 500 sales ($25,000 of revenue) to cover the fixed costs.
What counts as a fixed cost and what is variable?
Fixed costs stay the same whether you sell one unit or a thousand in the period: rent, salaries, insurance, software subscriptions, loan payments. Variable costs come with each sale: materials, packaging, shipping, payment processing fees, sales commission.
Why does the calculator round units up?
You cannot sell part of a unit. If the formula gives 769.23 units, selling 769 still leaves a small loss, so 770 is the first whole number of sales where you stop losing money.
What if my price is below my variable cost?
Then every sale loses money and no number of sales will ever break even. You need to raise the price, cut the cost per unit, or both, before volume can help.
How do I include a profit goal?
Enter it as a target profit. It is added to the fixed costs, so the result is the number of units that covers your costs and leaves that profit. $10,000 of fixed costs plus a $5,000 profit goal at $20 per unit needs 750 sales.