Break-Even Point Formula
Calculate the break-even point where total revenue equals total costs.
Find how many units you must sell to cover fixed and variable costs.
The Formula
The break-even point is the number of units you must sell so that total revenue exactly covers total costs. Below this point you lose money. Above it you make a profit.
Variables
| Symbol | Meaning |
|---|---|
| Fixed Costs | Costs that stay the same regardless of sales (rent, salaries, insurance) |
| Selling Price | Price per unit charged to customers |
| Variable Cost | Cost per unit that changes with production (materials, labor, shipping) |
| Contribution Margin | Selling Price - Variable Cost per Unit |
Break-Even in Revenue
Contribution Margin Ratio = (Selling Price - Variable Cost) / Selling Price
Example 1
A bakery has $3,000/month in fixed costs. Each cake sells for $25 and costs $10 to make. How many cakes must they sell?
Contribution margin = $25 - $10 = $15 per cake
Break-even units = $3,000 / $15
Break-even = 200 cakes per month
Example 2
A software company has $50,000 in monthly fixed costs. Their app sells for $9.99 with $1.50 variable cost per sale. What is the break-even revenue?
Contribution margin = $9.99 - $1.50 = $8.49
Contribution margin ratio = $8.49 / $9.99 = 0.8499
Break-even units = $50,000 / $8.49 ≈ 5,889 sales
Break-even revenue = $50,000 / 0.8499
Break-even revenue ≈ $58,830 per month (about 5,889 sales)
When to Use It
Use the break-even formula for business planning:
- Determining minimum sales targets for a new product or business
- Deciding whether to launch a product at a given price point
- Evaluating how changes in costs or pricing affect profitability
- Setting realistic sales goals and budgets
Key Notes
- Break-even point: BEP = Fixed Costs / Contribution Margin per unit: Contribution margin (CM) = Selling price − Variable cost per unit. The BEP is the output level where total revenue exactly equals total cost — profit is zero. Below BEP: loss; above BEP: profit.
- Break-even revenue: BEP_revenue = Fixed Costs / CM ratio: CM ratio = CM per unit / Selling price = (P − VC) / P. Useful when the mix of products makes per-unit analysis complex — apply the overall CM ratio to aggregate revenue.
- Shutdown condition vs break-even: In economics, a firm should continue operating in the short run as long as price covers average variable cost (P ≥ AVC), even if it cannot cover fixed costs. The short-run shutdown point is P = AVC; the break-even point is P = ATC (average total cost, including fixed costs).
- Operating leverage: A firm with high fixed costs has high operating leverage — a small percentage increase in sales produces a disproportionately large percentage increase in operating profit. Operating leverage = CM / Operating income. This amplifies both gains (above BEP) and losses (below BEP).
- Applications: Break-even analysis is used in new venture feasibility assessment, pricing decisions, capacity planning, make-vs-outsource analysis, event management (minimum ticket sales to cover costs), and evaluating the risk of fixed-cost commitments like long-term leases.