What Is Break-Even Analysis and How Does It Work?
Break-even analysis determines the exact point where your total revenue equals your total costs — meaning your business is neither making a profit nor incurring a loss. The core formula is: Break-Even Point (units) = Fixed Costs / (Selling Price per Unit - Variable Cost per Unit). Every unit sold beyond this point generates profit; every unit below it means a loss.
This analysis is fundamental for pricing decisions, startup planning, and evaluating whether a new product or service is financially viable. It tells you the minimum sales volume you need to cover all expenses before any profit is realized.
The Break-Even Formula
Break-Even Point = Fixed Costs / (Price per Unit - Variable Cost per Unit)
The denominator — Price minus Variable Cost — is called the contribution margin. It represents how much each sale contributes toward covering fixed costs. The higher the contribution margin, the fewer units needed to break even.
Worked Example
Suppose you run a small candle business with these numbers:
- Fixed costs: $3,000/month (rent $1,200, insurance $300, website $100, salary $1,400)
- Selling price: $28 per candle
- Variable cost: $10 per candle (wax $4, wick/jar $3, label/packaging $2, shipping $1)
Contribution margin: $28 - $10 = $18 per candle
Break-even point: $3,000 / $18 = 167 candles per month
You need to sell 167 candles monthly to cover all costs. At that volume, total revenue is $4,676 and total costs are also $4,676 ($3,000 fixed + $1,670 variable). Every candle sold beyond 167 generates $18 in profit. Selling 200 candles produces a monthly profit of (200 - 167) × $18 = $594.
Break-Even in Revenue Dollars
You can also express break-even as a revenue target. The contribution margin ratio is $18 / $28 = 64.3%. Break-even revenue = $3,000 / 0.643 = $4,667. This is useful for service businesses or companies that sell multiple products at varying prices.
When to Use Break-Even Analysis
- Before launching a new product to validate pricing and volume assumptions
- When evaluating whether to take on additional fixed costs (new lease, new hire)
- To set minimum sales targets for each month or quarter
- When considering a price change to understand the impact on required volume
- In startup business plans to demonstrate financial viability to investors or lenders
Try It Yourself
Enter your fixed costs, selling price, and variable costs to instantly find your break-even point in units and revenue.
Open Break-Even CalculatorFrequently Asked Questions
What is the difference between break-even in units and break-even in revenue?
Break-even in units tells you how many items you need to sell: Fixed Costs / (Price - Variable Cost per Unit). Break-even in revenue tells you the total dollar amount of sales needed: Fixed Costs / Contribution Margin Ratio, where the contribution margin ratio is (Price - Variable Cost) / Price. Both reach the same point — one is expressed in units sold, the other in dollars of revenue.
How do I find my fixed and variable costs?
Fixed costs remain constant regardless of sales volume: rent, insurance, salaried employees, loan payments, and software subscriptions. Variable costs change with each unit produced or sold: raw materials, packaging, shipping, sales commissions, and credit card processing fees. Some costs are semi-variable (like utilities), which you can split into fixed and variable components based on historical data.
What is contribution margin and why does it matter?
Contribution margin is the amount each sale contributes toward covering fixed costs and generating profit. It equals Price minus Variable Cost per Unit. A $50 product with $20 in variable costs has a $30 contribution margin. The higher your contribution margin, the fewer units you need to sell to break even. A contribution margin ratio below 20% typically signals thin margins that require high volume to be profitable.
How often should I recalculate my break-even point?
Recalculate whenever your costs or pricing change meaningfully — at minimum quarterly, and always before making major decisions like signing a new lease, hiring staff, launching a new product, or raising prices. Many businesses recalculate monthly as part of their financial review. Even small changes in variable costs or pricing can significantly shift the break-even point.