What Is the Break-Even Point?
The break-even point is the level of sales at which your total revenue exactly equals your total costs — you are making neither a profit nor a loss. Every unit sold beyond break-even generates profit; every unit short of it represents a loss.
The Break-Even Formula
Break-Even (Units) = Fixed Costs ÷ (Selling Price per Unit − Variable Cost per Unit)
Break-Even (Revenue) = Fixed Costs ÷ Contribution Margin Ratio
Where: Contribution Margin Ratio = (Selling Price − Variable Cost) ÷ Selling Price
Fixed Costs vs Variable Costs
Fixed costs do not change with output: rent, salaries, insurance, software subscriptions, loan repayments.
Variable costs scale with output: raw materials, packaging, shipping, transaction fees, sales commissions.
Worked Example: Product Business
A desk accessories manufacturer:
Fixed costs: $10,000/month. Selling price: $20. Variable cost: $8.
Contribution margin = $12.
Break-even = $10,000 ÷ $12 = 834 units/month ($16,680 revenue)
Worked Example: Service Business
A consulting firm:
Fixed costs: $22,000/month. Billable rate: $2,200/day. Variable cost/day: $400.
Contribution margin = $1,800.
Break-even = $22,000 ÷ $1,800 = 12.2 billable days/month (61% utilisation at 20 working days).
Break-Even Benchmarks by Business Type
| Business Type | Typical Gross Margin | Implication |
|---|---|---|
| Physical product (retail) | 30–50% | Higher volume needed to cover fixed costs |
| Professional services | 60–80% | Fewer billable units needed to break even |
| SaaS / software | 70–90% | Low variable costs = fast break-even post-launch |
| Restaurant / hospitality | 25–35% | Thin margins make volume critical |
How to Use Break-Even for Pricing Decisions
- Set your minimum viable price. At your expected volume, what selling price generates enough contribution margin to cover fixed costs?
- Model volume scenarios. At 50% of expected volume, are you still breaking even?
- Factor in profit targets. Add your target monthly profit to fixed costs before dividing — this gives the sales volume needed for your target profit, not just survival.
Limitations of Break-Even Analysis
- Assumes costs are cleanly fixed or variable (semi-variable costs need splitting)
- Price is assumed constant (discounts and volume tiers change break-even)
- Fixed costs can step up as you scale (new hires, larger premises)
- Ignores cash flow timing — you might break even on paper but run short of cash
Related Calculators
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