Break-Even Calculator
The break-even point is where contribution margin times units sold exactly covers fixed costs. Below it, every unit deepens the loss; above it, every unit is operating profit.
The break-even formula
Contribution margin per unit is the price minus the variable cost per unit; the contribution margin ratio is that figure divided by price. Break-even analysis works because every unit sold contributes the same amount toward fixed costs, until those costs are fully covered, after which every unit drops to operating profit.
Fixed vs. variable, properly classified
The arithmetic is trivial; the classification is where break-even analysis goes wrong. Rent and salaried headcount are fixed in the short run but step-functions in the medium run — adding a second shift triples plant labor overnight. Sales commissions are variable; the sales manager's salary is fixed. Software licensing is often per-seat (variable in headcount, fixed in volume). Spend more time on the categorization than on the formula.
Worked example
A specialty coffee roaster has $14,000 in monthly fixed costs (rent, salaries, equipment lease). Each 12-oz bag sells for $18 and costs $7 in beans, packaging, and per-unit overhead. Contribution margin: $11. Break-even: 14,000 ÷ 11 = 1,273 bags per month, or $22,909 in revenue. To earn a $5,000 monthly profit, they need (14,000 + 5,000) ÷ 11 = 1,728 bags.
Margin of safety
The margin of safety is current sales minus break-even sales, expressed as a percentage of current sales. A 40% margin of safety means revenue could fall 40% before the business begins to lose money. Pair break-even with margin of safety on every plan; a low break-even with no headroom above it is just as risky as a high break-even with healthy headroom.
What break-even doesn't account for
- Capacity limits. If breaking even requires more units than your equipment, lease, or labor pool can produce, the answer is not "break-even is X units" — the answer is "you need a different cost structure."
- Demand elasticity. Raising price increases contribution margin per unit but typically reduces volume. Break-even alone tempts you to raise prices indefinitely.
- Mix shifts. Multi-product businesses break even on a weighted-average basis. Mix changes can move the break-even point even when nothing else changes.
- Cash vs. accrual. Break-even is profit-based, not cash-based. A business at break-even can still run out of cash if customers pay slowly.