The point where a business stops losing money
Every month starts in the red: rent, salaries and subscriptions are due whether you sell anything or not. Each sale chips away at those fixed costs, and the break-even point is the volume at which they are fully covered. Every unit sold beyond it is profit.
The formulas
- Contribution margin per unit = price − variable cost per unit
- Break-even units = fixed costs ÷ contribution margin per unit (rounded up)
- Break-even revenue = break-even units × price
- Contribution margin ratio = contribution margin ÷ price
- Margin of safety = (expected units − break-even units) ÷ expected units
Fixed costs do not change with volume over the period. Variable costs rise with every unit: materials, packaging, payment processing, shipping, sales commission.
Worked example: a small online shop
Fixed costs are $12,000 a month. Each product sells for $50 and costs $20 in variable costs. You expect to sell 600 units a month.
- Contribution margin: 50 − 20 = $30 per unit, a 60% ratio.
- Break-even: 12,000 ÷ 30 = 400 units a month.
- Break-even revenue: 400 × 50 = $20,000.
- At 600 units, profit is 600 × 30 − 12,000 = $6,000.
- Margin of safety: (600 − 400) ÷ 600 = 33.3%. Sales can fall by a third before you lose money.
How price changes the break-even point
| Price | Break-even units | Break-even revenue | Profit at 600 units |
|---|---|---|---|
| $30 | 1,200 | $36,000 | −$6,000 |
| $40 | 600 | $24,000 | $0 |
| $50 | 400 | $20,000 | $6,000 |
| $60 | 300 | $18,000 | $12,000 |
| $75 | 219 | $16,425 | $21,000 |
| $100 | 150 | $15,000 | $36,000 |
These rows assume volume stays at 600 units whatever the price, which is optimistic. In practice, test a price change with a realistic estimate of the units you would lose or gain.
Three ways to lower your break-even point
- Raise the contribution margin: a higher price or a cheaper supplier increases what each sale contributes. Going from $30 to $35 per unit cuts break-even from 400 to 343 units.
- Cut fixed costs: a cheaper lease or a software audit lowers the hurdle directly.
- Change the mix: if you sell several products, push the ones with the highest contribution margin.
Using it for a business plan
Lenders and SBA loan officers expect a break-even analysis in a business plan. Use a full month, or a full year, of fixed costs, include your own salary if the business must pay you, and include loan payments. Then compare break-even units with what you can realistically produce and sell: if the break-even point is close to your maximum capacity, the plan is fragile even if it looks profitable on paper.
Limits of the model
The calculation assumes one price, constant variable costs and fixed costs that stay put. Real businesses get volume discounts, hire staff in steps and run promotions. Treat the result as a target and rerun it whenever a cost or price changes.