How to Calculate Break-Even Point: Units, Revenue, Formula and Example

What Is the Break-Even Point?

The break-even point is the sales level at which contribution covers fixed costs. At that point, the modeled operating profit is zero before costs or revenues outside the model.

Break-Even in Units

Suppose fixed costs are $20,000, selling price is $50 and variable cost is $30. Contribution per unit is $20, so break-even volume is 20,000 / 20 = 1,000 units.

Break-Even Revenue

In the example, the contribution margin ratio is 20 / 50 = 40%. Break-even revenue is therefore $20,000 / 0.40 = $50,000.

How to Calculate Break-Even Step by Step

1. List the fixed costs for the period.
2. Identify the selling price per unit.
3. Estimate variable cost per unit.
4. Calculate contribution per unit.
5. Divide fixed costs by contribution per unit.
6. Check the result against realistic sales capacity and demand.

What Counts as a Fixed or Variable Cost?

Classification depends on the business and time horizon. Rent may be relatively fixed for a period, while materials may vary with units sold. Some costs are mixed, meaning they contain both fixed and variable components. State your assumptions rather than forcing every expense into a simple category.

What Happens When Price or Cost Changes?

A higher selling price generally increases contribution and lowers the break-even volume if demand does not fall. A higher variable cost reduces contribution and raises break-even volume. A higher fixed-cost base also raises the break-even point.

Multi-Product Businesses

The simple formula works best for a single product or a stable sales mix. For several products, break-even analysis may use a weighted contribution margin based on an assumed sales mix. If the mix changes materially, the break-even result changes too.

Limitations

Break-even analysis is a model, not a forecast. It often assumes a stable price, variable cost, fixed-cost base and sales mix. Real businesses face taxes, financing costs, discounts, capacity limits, demand changes and other factors.

Use the Tervilo Break-Even Calculator

Use the Break-Even Calculator to test fixed costs, variable costs and selling price under the simple model.