Your break-even point is the sales level where total revenue exactly covers total costs, so profit is zero. To find it in units, divide fixed costs by the contribution margin per unit (price minus variable cost). A business with $12,000 of monthly fixed costs that sells a product for $40 with $16 of variable cost per unit earns $24 per unit toward fixed costs, so it breaks even at $12,000 ÷ $24 = 500 units a month, or $20,000 in sales. Every unit beyond that adds $24 of profit.
The break-even formulas
The contribution margin is what each sale contributes to covering fixed costs and then to profit. The break-even calculator solves these for you.
Step 1: Separate fixed and variable costs
| Usually fixed (per month) | Usually variable (per unit) |
|---|---|
| Rent and utilities base charges | Raw materials and inventory cost |
| Salaries and benefits | Packaging and shipping |
| Insurance | Sales commissions |
| Software and subscriptions | Card processing fees (about 2% to 3% of price) |
| Loan payments and equipment leases | Hourly labor tied directly to production |
| Marketing retainers | Marketplace or platform fees |
Some costs are mixed, such as a phone plan with a base fee plus overage. Split them into their fixed and variable parts. Be honest here: underestimating variable costs is the most common reason break-even estimates come out too optimistic.
Step 2: Compute the contribution margin
- Price: $40.00
- Variable cost: $16.00 (materials $11.00, packaging $2.80, processing fees $1.20, shipping supplies $1.00)
- Contribution margin: $40.00 − $16.00 = $24.00 per unit
- Contribution margin ratio: $24 ÷ $40 = 60%
Step 3: Divide
- Break-even units: $12,000 ÷ $24 = 500 units
- Break-even sales: $12,000 ÷ 0.60 = $20,000
Check: 500 units × $40 = $20,000 of revenue. Variable costs are 500 × $16 = $8,000. $20,000 − $8,000 − $12,000 = $0 profit.
Adding a profit target
To find the sales needed for a target profit, add the profit to fixed costs:
For $6,000 of monthly profit: ($12,000 + $6,000) ÷ $24 = 750 units, or $30,000 of sales. If the target is after-tax profit, gross it up first: $6,000 after a 25% tax rate requires $8,000 pre-tax, so (12,000 + 8,000) ÷ 24 = 833.3, rounded up to 834 units. The profit goal calculator works backward from any target.
Margin of safety
The margin of safety tells you how far sales can fall before you lose money:
If you expect to sell 650 units a month, your margin of safety is (650 − 500) ÷ 650 = 23.1%. Sales could drop by almost a quarter before you hit a loss. A thin margin of safety, under about 10%, means a slow month puts you in the red.
How price and cost changes move break-even
Small changes in price or variable cost swing break-even a lot, because they change the contribution margin on every unit:
| Scenario | Contribution margin | Break-even units | Change vs. base |
|---|---|---|---|
| Base: $40 price, $16 variable, $12,000 fixed | $24 | 500 | — |
| Raise price to $44 | $28 | 429 | −71 units |
| Variable cost rises to $18 | $22 | 546 | +46 units |
| Fixed costs rise to $13,500 | $24 | 563 | +63 units |
| 10% discount ($36 price) | $20 | 600 | +100 units |
A 10% discount requires 20% more unit sales just to break even, because the whole $4 comes out of the $24 margin. For the relationship between price, cost and margin, see margin vs. markup.
Multiple products: use a weighted contribution margin
Most businesses sell more than one thing. Weight each product’s contribution margin by its share of unit sales:
| Product | Price | Variable cost | Contribution margin | Sales mix |
|---|---|---|---|---|
| A | $40 | $16 | $24 | 60% |
| B | $25 | $15 | $10 | 40% |
Weighted contribution margin = 0.60 × $24 + 0.40 × $10 = $18.40.
Break-even units = $12,000 ÷ $18.40 = 652.2, so about 653 units: roughly 392 of product A and 261 of product B. If the mix shifts toward the lower-margin product B, break-even rises, even if total units stay the same.
Service businesses: break-even hours
For services, the “unit” is often an hour. A consultant with $5,000 of monthly fixed costs (software, insurance, office, and a salary draw) who bills $100 an hour with $10 of variable cost per hour (subcontracted tools, card fees) breaks even at $5,000 ÷ $90 = 55.6, or 56 billable hours a month. Comparing that with realistic billable hours shows whether the rate works.
Limits of break-even analysis
- It assumes price and variable cost per unit stay constant, but bulk discounts and price changes break that assumption.
- Fixed costs are only fixed within a range; growing past capacity means new hires or space.
- It ignores timing. You may be profitable on paper and still short of cash if customers pay slowly.
- It does not include the upfront investment. To see how long it takes to recover startup spending, compare monthly profit with the total from the startup costs calculator.
Quick steps
- Total monthly fixed costs.
- Find variable cost per unit, including fees and shipping.
- Subtract from price to get contribution margin.
- Divide fixed costs by contribution margin and round up.
- Test a few price and cost scenarios, then compare break-even with realistic sales.
For return on the money you invest to start or grow, read how to calculate ROI. The profit calculator shows profit at any sales volume.
This guide is general business education, not financial or accounting advice. Real cost behavior is messier than a simple model; review your numbers with an accountant before major pricing or investment decisions.
Frequently asked questions
What is the break-even formula?
Break-even units = fixed costs ÷ (price per unit − variable cost per unit). With $12,000 of monthly fixed costs, a $40 price and $16 of variable cost, you need $12,000 ÷ $24 = 500 units a month to break even.
How do I calculate break-even in sales dollars?
Divide fixed costs by the contribution margin ratio, which is (price − variable cost) ÷ price. In the example, $12,000 ÷ 0.60 = $20,000 of monthly sales.
What counts as a fixed cost?
Costs that do not change with how much you sell over the period you are analyzing, such as rent, salaried staff, insurance, software subscriptions, loan payments and equipment leases. Materials, packaging, sales commissions and payment processing fees are usually variable.
What if break-even units is not a whole number?
Round up. You cannot sell part of a unit, and rounding down would leave you slightly short of covering fixed costs. 428.6 units means you need to sell 429.
How is break-even different from payback period?
Break-even finds the sales volume where profit is zero in a period. Payback period measures how long it takes cumulative cash flow to repay an upfront investment, such as startup costs. A business can be above break-even each month and still need years to pay back its initial investment.