Break-even analysis tells you how much you must sell to cover all of your costs. Below that level, you make a loss; above it, you make a profit. It is one of the most practical tools for anyone launching a product, setting a price or deciding whether a new project is worth the risk. The core formula is: break-even units = fixed costs ÷ (selling price per unit − variable cost per unit).

Key Terms

  • Fixed costs stay the same however much you sell in the short term, such as rent, salaries, insurance and software subscriptions.
  • Variable costs change with each unit sold, such as materials, packaging, payment fees and shipping.
  • Contribution margin is the selling price minus the variable cost per unit. It is the amount each sale contributes toward covering fixed costs and then profit.
  • Contribution margin ratio is the contribution margin divided by the selling price.

A Worked Example

Imagine a small business with fixed costs of 12,000 per month. It sells a product for 25, and each unit costs 10 in materials and fees.

  • Contribution margin = 25 − 10 = 15 per unit.
  • Break-even units = 12,000 ÷ 15 = 800 units per month.
  • Break-even revenue = 800 × 25 = 20,000.

You can reach the same revenue figure with the ratio. The contribution margin ratio is 15 ÷ 25 = 60%, so break-even revenue = 12,000 ÷ 0.60 = 20,000. This version is useful when you sell many products and only know the overall margin.

Setting a Profit Target

To work out how much to sell for a target profit, add the target to the fixed costs: required units = (fixed costs + target profit) ÷ contribution margin. To earn 6,000 a month, you need (12,000 + 6,000) ÷ 15 = 1,200 units. That is 50% more than the break-even volume, a useful reality check on whether your goal is achievable.

Margin of Safety

The margin of safety shows how far sales can fall before you start losing money: (actual sales − break-even sales) ÷ actual sales. If you sell 1,000 units against a break-even point of 800, your margin of safety is 200 ÷ 1,000 = 20%. A small margin of safety means your business is vulnerable to a slow month.

How Price and Cost Changes Move the Break-Even Point

Break-even analysis is most valuable for testing decisions:

  • Raising the price to 28 lifts the contribution margin to 18, so break-even falls to 12,000 ÷ 18 = 667 units.
  • If variable costs rise from 10 to 12, the margin falls to 13 and break-even rises to 12,000 ÷ 13 = about 924 units.
  • If you cut fixed costs by 2,000, break-even falls to 10,000 ÷ 15 = about 667 units.

Notice how sensitive the result is. A small change in the margin can shift break-even by hundreds of units, which is why pricing deserves careful testing. For margin and markup definitions, see our guide to calculating profit and loss.

Using Break-Even for Different Decisions

  • Launching a product: estimate whether realistic sales can ever cover the costs.
  • Pricing: test how many extra sales a discount must generate to keep profit unchanged.
  • Hiring or equipment: a new fixed cost raises break-even, so check that sales can support it.
  • Subscription businesses: use monthly recurring revenue as the price and include customer acquisition costs as part of the costs.

Limits of Break-Even Analysis

  • It assumes a constant price and constant variable cost per unit, but discounts and bulk purchasing can change both.
  • Fixed costs are fixed only within a range. A big increase in volume may require more staff or space.
  • With several products, you need the weighted average contribution margin based on your sales mix.
  • It ignores time and cash flow: you may reach break-even on paper and still run short of cash.

Questions to ask

What happens to break-even if the price drops by 10%, or if variable cost rises by 10%? If either answer is more than you can realistically sell, the plan has too little margin of safety.