Break-even formulas
Contribution is what each sale leaves over after its own direct costs. That money first pays the fixed costs; once they are covered, every further unit's contribution is profit.
Worked example
A product sells for $50 and costs $30 to make, pack and ship, so each unit contributes $20 (a 40% contribution margin). With $10,000 of monthly fixed costs, break-even is 10,000 / 20 = 500 units, or $25,000 of revenue. To make $5,000 profit you need (10,000 + 5,000) / 20 = 750 units. If you expect to sell 600, your margin of safety is (600 - 500) / 600 = 16.7%: sales can fall by a sixth before you start losing money.
Price moves break-even more than you think
Because break-even depends on contribution, not price, a small price change has a large effect:
| Price | Contribution per unit | Break-even units |
|---|---|---|
| $45 | $15 | 667 |
| $50 | $20 | 500 |
| $55 | $25 | 400 |
| $60 | $30 | 334 |
A 10% price increase (from $50 to $55) cuts the break-even point by 20% in this example. The same logic works in reverse: a 10% discount raises it by a third. See the discount calculator for how much more you must sell to make a discount pay.
Fixed or variable?
- Fixed: rent, salaries, software subscriptions, insurance, loan repayments, your own minimum pay.
- Variable: product cost, packaging, shipping, payment processing, marketplace fees, sales commissions.
- Advertising can be treated either way. If you set a fixed monthly budget, put it in fixed costs. If you pay per sale (CPA) or think of ads as cost per order, add it to the variable cost per unit.
Limits of break-even analysis
The model assumes a constant price and constant cost per unit. In reality bulk buying lowers unit cost, discounts lower price, and fixed costs step up when you hire or move. Recalculate whenever one of those changes, and treat the result as a planning number, not a guarantee.
Frequently asked questions
What is a break-even point?
The level of sales at which total revenue equals total costs, so profit is zero. Below it you lose money; above it each additional sale contributes profit.
How do I calculate break-even in revenue instead of units?
Divide fixed costs by the contribution margin percentage. With $10,000 fixed costs and a 40% contribution margin, break-even revenue is $25,000.
What is the margin of safety?
How far sales can fall before you reach break-even, as a share of expected sales: (Expected sales - Break-even sales) / Expected sales.