Break-even analysis: formula, example and decision guide

What break-even analysis answers

Break-even analysis estimates the sales volume at which total contribution covers fixed costs. At that point operating profit is zero. It is useful for pricing, launch planning and capacity decisions, but it is a planning model rather than a guarantee.

Contribution per unit = Selling price per unit - Variable cost per unit

Break-even units = Fixed costs ÷ Contribution per unit

Worked example

Assume monthly fixed costs of $25,000, a selling price of $100 and variable cost of $40 per unit. Contribution is $60 per unit. The break-even point is 416.67 units, so at least 417 whole units are required. At the exact mathematical point, break-even revenue is approximately $41,667.

Contribution margin ratio

For businesses without a meaningful unit, use the contribution margin ratio. If variable costs are 40% of revenue, the contribution margin is 60%. Break-even revenue equals fixed costs divided by 60%.

Test the assumptions

• Does every sale have the same price and variable cost?
• Are sales commissions, payment fees and fulfillment truly included?
• Will fixed costs step up when volume reaches a capacity limit?
• Is the expected sales mix stable?
• How long will customers take to pay?

Break-even does not equal cash break-even when customers pay later or capital expenditure is required. Combine the result with a cash forecast and sensitivity cases. Use the free break-even calculator to test price, volume and cost assumptions instantly.