Break-even analysis answers the most fundamental question in business: how much do I need to sell before I stop losing money? Enter your fixed costs for a period (usually a month), your selling price per unit and your variable cost per unit.
The Break-Even Formula
The denominator — price minus variable cost — is your contribution margin: what each sale contributes toward covering fixed costs. Once fixed costs are covered, every additional unit’s contribution margin becomes profit.
Worked Example
A business with $12,000 in monthly fixed costs sells a product for $40 with $25 of variable cost per unit. Contribution margin is $15/unit, so break-even is 12,000 ÷ 15 = 800 units, or $32,000 in monthly revenue. Unit 801 onward, the business earns $15 of profit per sale.
Frequently Asked Questions
What are fixed vs variable costs?
Fixed costs stay the same regardless of volume (rent, salaries, insurance, software). Variable costs scale with each unit sold (materials, packaging, payment processing, shipping).
What is contribution margin?
Price per unit minus variable cost per unit — the amount each sale contributes toward fixed costs, and after break-even, toward profit.
How do I lower my break-even point?
Raise prices, cut variable costs per unit, or reduce fixed costs. Small price increases often have an outsized effect because they flow straight into contribution margin.