What is the break-even point?
The break-even point is the level of sales where total revenue equals total costs. At that point the business makes neither a profit nor a loss. Every unit sold above it adds its contribution margin to profit, and every unit below it leaves part of the fixed costs uncovered.
Break-even analysis is part of cost-volume-profit (CVP) analysis, one of the first topics in managerial accounting.
Break-even formulas
Worked example
A shop has fixed costs of $12,000 a month. It sells mugs for $50 each, and each mug costs $30 to make.
- Contribution margin: $50 − $30 = $20 per mug.
- Break-even units: $12,000 ÷ $20 = 600 mugs.
- Break-even sales: 600 × $50 = $30,000.
- To earn a $4,000 profit: ($12,000 + $4,000) ÷ $20 = 800 mugs.
Frequently asked questions
What is the break-even point?
The break-even point is the level of sales where total revenue equals total costs, so the business makes neither a profit nor a loss.
What is contribution margin?
Contribution margin is the selling price minus the variable cost per unit. It is the amount each sale contributes toward fixed costs and then profit.
Why do you round the units up?
A business can't sell part of a unit. Rounding down would leave it just short of covering its costs, so break-even units are always rounded up.
How do I include a target profit?
Add the target profit to fixed costs, then divide by the contribution margin per unit: (Fixed costs + Target profit) ÷ Contribution margin.
What if the price is lower than the variable cost?
Then the contribution margin is zero or negative. The business loses money on every sale and can never break even, however many units it sells.