⚖️ Break-Even Formula
Break-even point = Fixed Costs ÷ (Price per Unit - Variable Cost per Unit). This shows exactly how many units you need to sell to cover all costs. Price above this point generates profit, below creates losses.
Break-Even Analysis Drives Smart Business Decisions
Break-even analysis tells you the minimum sales needed to avoid losses, helps set profitable prices, and reveals how changes in costs or prices affect profitability. Without this analysis, you are pricing blind and risking business failure.
This guide shows you how to calculate break-even points, set prices that ensure profitability, understand contribution margins, and use break-even analysis for strategic planning.
Understanding Break-Even Components
Break-even analysis requires understanding the relationship between fixed costs, variable costs, and pricing.
Fixed Costs (Overhead)
Monthly Fixed Costs
- • Rent and utilities: $3,000
- • Insurance premiums: $500
- • Software subscriptions: $800
- • Salaries and benefits: $8,000
- • Loan payments: $1,200
- • Professional services: $600
Total Monthly Fixed Costs: $14,100
Variable Costs per Unit
- • Raw materials: $15
- • Direct labor: $25
- • Packaging: $3
- • Shipping: $7
- • Credit card fees: $2
- • Sales commissions: $8
Total Variable Cost per Unit: $60
Contribution Margin
Contribution Margin Calculation
Price per Unit: $150
Variable Cost per Unit: $60
Contribution Margin per Unit: $90
Contribution Margin Percentage:
$90 ÷ $150 = 60%
This means 60 cents of every dollar goes toward fixed costs and profit
Break-Even Calculation Methods
Calculate break-even in units and dollars to understand your minimum performance requirements.
Break-Even in Units
| Component | Amount | Calculation | Result |
|---|---|---|---|
| Fixed Costs (Monthly) | $14,100 | Given | $14,100 |
| Price per Unit | $150 | Given | $150 |
| Variable Cost per Unit | $60 | Given | $60 |
| Contribution Margin | $90 | $150 - $60 | $90 |
| Break-Even Units | 157 units | $14,100 ÷ $90 | 157 units/month |
Break-Even in Sales Revenue
Revenue Break-Even Calculation
Method 1: Units × Price
157 units × $150 = $23,550 monthly revenue needed
Method 2: Fixed Costs ÷ Contribution Margin %
$14,100 ÷ 60% = $23,500 monthly revenue needed
Pricing Strategies Based on Break-Even
Use break-even analysis to set prices that ensure profitability and business sustainability.
Cost-Plus Pricing with Break-Even
Step 1: Calculate Full Cost per Unit
Variable costs + allocated fixed costs per unit
Variable cost: $60
Fixed cost per unit (at 200 units): $14,100 ÷ 200 = $70.50
Full cost per unit: $130.50
Step 2: Add Profit Margin
Full cost × (1 + desired profit margin)
Full cost: $130.50
Desired margin: 25%
Selling price: $130.50 × 1.25 = $163.13
Break-Even Sensitivity Analysis
| Price Change | New Price | Contribution Margin | Break-Even Units | % Change |
|---|---|---|---|---|
| -10% | $135 | $75 | 188 units | +20% more units needed |
| -5% | $142.50 | $82.50 | 171 units | +9% more units needed |
| Current | $150 | $90 | 157 units | Baseline |
| +5% | $157.50 | $97.50 | 145 units | -8% fewer units needed |
| +10% | $165 | $105 | 134 units | -15% fewer units needed |
Using Break-Even for Business Planning
Break-even analysis informs strategic decisions beyond pricing.
Sales Target Setting
📈 Monthly Sales Goals
- ☐ Break-even target: 157 units ($23,550 revenue)
- ☐ Minimum profit target: 180 units ($27,000 revenue)
- ☐ Growth target: 225 units ($33,750 revenue)
- ☐ Stretch target: 275 units ($41,250 revenue)
- ☐ Daily unit goal: 157 ÷ 22 working days = 7.1 units/day
- ☐ Weekly unit goal: 157 ÷ 4.3 weeks = 36.5 units/week
- ☐ Buffer for seasonality: +20% during slow periods
- ☐ Team performance metrics aligned with targets
Cost Management Strategies
Reduce Fixed Costs
- • Negotiate lower rent or move locations
- • Switch to variable-cost contractors
- • Eliminate unused subscriptions
- • Renegotiate insurance and service contracts
- • Impact: Lower break-even point
Reduce Variable Costs
- • Negotiate better supplier pricing
- • Improve production efficiency
- • Reduce waste and defects
- • Optimize shipping and logistics
- • Impact: Higher contribution margin
Multi-Product Break-Even Analysis
Calculate break-even for businesses with multiple products or services.
Weighted Average Contribution Margin
| Product | Price | Variable Cost | Contribution | Sales Mix | Weighted Contribution |
|---|---|---|---|---|---|
| Product A | $150 | $60 | $90 | 60% | $54 |
| Product B | $100 | $45 | $55 | 30% | $16.50 |
| Product C | $80 | $35 | $45 | 10% | $4.50 |
| Total | 100% | $75 |
Multi-Product Break-Even Calculation
Break-Even with Product Mix
Weighted Average Contribution Margin: $75
Fixed Costs: $14,100
Break-Even in Total Units: $14,100 ÷ $75 = 188 units
Break-Even by Product:
Product A: 188 × 60% = 113 units
Product B: 188 × 30% = 56 units
Product C: 188 × 10% = 19 units