Break-Even Analysis: Formula and How to Do It
Break-even analysis finds the point where total revenue equals total costs, so a business knows how much it must sell to stop losing money. Here is the break-even formula, a worked example, and how to use it.
Before a business can make a profit, it has to stop losing money. The point where it does, where sales exactly cover costs, is the break-even point, and finding it is one of the most useful exercises in finance. Break-even analysis tells you how much you need to sell to cover your costs, how pricing and cost changes move that target, and how much cushion you have.
This guide explains what break-even analysis is, the formula, a worked example, and how to use it.
What is break-even analysis?
Break-even analysis is a calculation that finds the point at which total revenue equals total costs, so the business makes neither a profit nor a loss. Below the break-even point, the business loses money; above it, every additional sale contributes to profit. It is used to set pricing, plan production, evaluate new products, and understand the risk in a cost structure.
The break-even point is the finish line for covering your costs and the starting line for making a profit. Everything sold below it funds the business; everything above it builds it.
The break-even formula
The break-even point in units is fixed costs divided by the contribution margin per unit (the price per unit minus the variable cost per unit):
Break-Even Point (units) = Fixed Costs / (Price per Unit − Variable Cost per Unit)
For example, with $100,000 in fixed costs, a $50 selling price, and $30 of variable cost per unit:
- Contribution margin per unit = $50 − $30 = $20
- Break-even point = $100,000 / $20 = 5,000 units
The company must sell 5,000 units to break even. To express it in dollars, multiply by the price: 5,000 × $50 = $250,000 in break-even revenue.
The building blocks
- Fixed costs. Costs that do not change with volume, like rent, salaries, and insurance.
- Variable costs. Costs that rise with each unit produced, like materials and direct labor.
- Contribution margin. Price per unit minus variable cost per unit, the amount each sale contributes toward covering fixed costs.
Once fixed costs are covered, the full contribution margin of each additional unit becomes profit, which is why understanding contribution margin is central to break-even analysis.
How to use break-even analysis
- Pricing. See how a price change moves the number of units you must sell.
- Cost decisions. Test how adding fixed costs (a new hire, more space) raises the break-even point.
- New products. Estimate whether a product can realistically sell enough to be worth launching.
- Risk. Compare the break-even point to expected sales to gauge your margin of safety.
Frequently asked questions
What is break-even analysis?
Break-even analysis finds the point where total revenue equals total costs, so the business makes neither a profit nor a loss. It shows how much you must sell to cover costs and how pricing and cost changes move that target.
What is the break-even formula?
Break-even point (in units) = Fixed Costs / (Price per Unit − Variable Cost per Unit). For example, $100,000 in fixed costs with a $20 contribution margin per unit gives a break-even point of 5,000 units.
What is the difference between fixed and variable costs?
Fixed costs stay the same regardless of volume (rent, salaries, insurance), while variable costs rise with each unit produced (materials, direct labor). The difference between price and variable cost per unit is the contribution margin.
How do you calculate the break-even point in dollars?
Calculate the break-even point in units, then multiply by the selling price. For example, 5,000 units at a $50 price is $250,000 in break-even revenue. Alternatively, divide fixed costs by the contribution margin ratio.
The bottom line
Break-even analysis answers a fundamental question: how much do we need to sell to stop losing money? Calculate it as fixed costs divided by the contribution margin per unit, and use it to set pricing, evaluate costs and new products, and measure risk. It is simple math with outsized value for planning.
If you want AI agents running the planning and analysis behind decisions like these, from break-even to forecasting, talk to our team.
