How the break-even point is calculated
Break-even is the sales level at which total revenue exactly covers total cost — the point where a business stops losing money and starts making it. Below that line every sale reduces the loss; above it every sale adds profit. It is the most useful single number for judging whether a price, a product line or a new location is viable at all, before any of it is committed to.
The calculation depends on splitting costs into fixed and variable. Fixed costs — rent, salaries, insurance, subscriptions — occur whether you sell anything or not. Variable costs — materials, packaging, shipping, payment fees — occur only when a unit is sold. The gap between price and variable cost is the contribution: what each sale contributes toward covering fixed costs before any of it can become profit.
Worked example
A business with 1,80,000 of fixed costs a month, selling a product at 1,500 with a variable cost of 600 per unit, and currently selling 300 units a month.
| Input | Value |
|---|
| Fixed costs per month | 1,80,000 |
| Price per unit | 1,500 |
| Variable cost per unit | 600 |
| Contribution per unit | 900 |
| Contribution margin ratio | 60% |
| Break-even units | 200 per month |
| Break-even revenue | 3,00,000 per month |
| Margin of safety | 100 units |
At 300 units the business is 100 units clear of break-even, a margin of safety of 33.33% of revenue — sales could fall by a third before it starts losing money. Break-even is also acutely sensitive to price. Discount the 1,500 by 10% and contribution falls from 900 to 750, pushing break-even from 200 units to 240: 20% more units sold, for 10% less on each one.
How to use this calculator
- List every fixed cost for one month — rent, salaries, insurance, software, loan interest — and total it.
- Work out variable cost per unit: materials, packaging, delivery, commission and payment processing fees.
- Enter your selling price and check contribution per unit first — if it is negative, no volume will ever rescue it.
- Compare the break-even figure against what you realistically sell in a month, not what you hope to.
- Re-run with a lower price and a higher fixed cost to see how much slack the number really has.
Frequently asked questions
How do I decide whether a cost is fixed or variable?
Ask what happens to it if you sell nothing next month. Rent, salaried staff and subscriptions continue, so they are fixed. Materials, shipping and transaction fees disappear, so they are variable. Some costs are mixed — a phone plan with a base fee plus usage — and are best split into their two parts.
What if contribution per unit is negative?
Then every sale increases your loss and there is no break-even point at any volume. The only fixes are raising the price or reducing variable cost. Growth is actively harmful in this situation, which is why contribution should be checked before break-even is even calculated.
How does break-even work for a service business with no units?
Use the revenue form instead. Divide fixed costs by the contribution margin ratio — the share of each sale left after directly attributable costs — and you get break-even revenue rather than break-even units. For consultants, a billable hour usually works well as the unit.
Should the owner's salary be treated as a fixed cost?
If you need to be paid to keep working, yes. Leaving it out produces a break-even point the business can hit while leaving you with nothing, which is not break-even in any useful sense. Include a market-rate salary for every role, including your own.
Do loan repayments belong in fixed costs?
Interest is a cost and belongs in the fixed total. Principal repayment is not a cost — it reduces a liability — but it is still cash leaving the account. Many businesses calculate an accounting break-even and a slightly higher cash break-even that includes principal, and manage against the second.
What is a healthy margin of safety?
There is no universal number, but the more volatile your sales, the more headroom you need. A seasonal business operating just above break-even in its strong months is in a far riskier position than a steady one at the same margin. Track the figure over time rather than against a benchmark.
This calculator is an educational tool. Results are estimates based on the inputs you provide and do not constitute financial advice. Verify figures with your bank, broker or a qualified advisor before acting on them.