What Is the Break-Even Point? A Simple Guide

What is the break-even point?

The break-even point is the level of sales at which total revenue exactly covers total costs. At break-even, the business has not made a profit, but it has not made a loss either.

Once sales move above break-even, additional contribution can start producing profit, assuming costs behave as expected.

Want to try the idea yourself? Use the Break-Even Calculator.

Fixed costs and variable costs

Fixed costs are costs that do not normally change directly with each unit sold, such as a monthly premises cost. Variable costs rise as you sell more, such as materials or packaging used for each product.

To calculate break-even units, you need the fixed costs, selling price per unit and variable cost per unit.

If you want to explore this topic further, see What Is Profit Margin and How Do You Calculate It?.

The break-even formula

Contribution per unit is selling price minus variable cost. Break-even units are fixed costs divided by contribution per unit.

For example, if fixed costs are £2,000, a product sells for £20 and variable cost is £12, each sale contributes £8 towards fixed costs. £2,000 divided by £8 gives a break-even point of 250 units.

Why break-even analysis is useful

Break-even analysis can help when setting prices, planning a new product or estimating how much sales volume is needed before a project becomes profitable. It also shows how sensitive the result is to changes in price or cost.

If the variable cost rises from £12 to £14 in the example above, contribution falls and more units must be sold to break even.

Calculate your break-even point

Use the Break-Even Calculator to test your own fixed costs, price and variable cost. Try changing one figure at a time to see which assumptions have the biggest effect.

Real businesses can have more complex cost structures, but a break-even calculation is a useful starting point for understanding the relationship between cost, price and sales volume.