Break-Even Point Formula
Learn the formulas used to calculate break-even units, break-even revenue, and sales needed for a target profit.
The break-even point estimates how much you need to sell before total revenue covers total fixed and variable costs. Understanding the formula helps you price products, control costs, and set realistic sales targets.
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Break-Even Units
Where:
First find how much each unit contributes after variable costs. Then divide fixed costs by that amount to estimate how many units you need to sell to break even.
Variables Explained
| Variable | What It Means | Unit |
|---|---|---|
| FC - Fixed costs | Total costs that stay the same for the period, regardless of units sold. | currency |
| SP - Selling price per unit | The amount charged for one unit sold. | currency |
| VC - Variable cost per unit | The cost that changes with each unit sold. | currency |
| CM - Contribution margin per unit | The amount each unit contributes toward fixed costs and profit. | currency |
| CMR - Contribution margin ratio | The share of each sales dollar available to cover fixed costs and profit. | percent |
| TP - Target profit | Desired profit above break-even for the period. | currency |
Step-by-Step Calculation
Calculate contribution margin per unit
Subtract the variable cost of one unit from the selling price of one unit.
contributionMarginPerUnit = sellingPricePerUnit - variableCostPerUnit
Calculate contribution margin ratio
This shows what portion of each revenue dollar is available to cover fixed costs and profit.
contributionMarginRatio = contributionMarginPerUnit / sellingPricePerUnit
Calculate break-even units
Divide total fixed costs by the contribution margin per unit to estimate how many units must be sold.
breakEvenUnits = fixedCosts / contributionMarginPerUnit
Calculate break-even revenue
Divide fixed costs by the contribution margin ratio to estimate the revenue needed to break even.
breakEvenRevenue = fixedCosts / contributionMarginRatio
Calculate units for target profit
Add the target profit to fixed costs, then divide by contribution margin per unit.
requiredUnitsForTargetProfit = (fixedCosts + targetProfit) / contributionMarginPerUnit
Calculate revenue for target profit
Add the target profit to fixed costs, then divide by the contribution margin ratio.
requiredRevenueForTargetProfit = (fixedCosts + targetProfit) / contributionMarginRatio
Example: Product business with a profit goal
Contribution margin per unit
50 - 20
$30.00
Contribution margin ratio
30 / 50
0.60 or 60%
Break-even units
5000 / 30
166.67 units
Break-even revenue
5000 / 0.60
$8,333.33
Units for target profit
(5000 + 2000) / 30
233.33 units
Revenue for target profit
7000 / 0.60
$11,666.67
Final Result
The business breaks even at about 166.67 units or $8,333.33 in revenue. To earn $2,000 in profit, it needs about 233.33 units or $11,666.67 in revenue.
Assumptions
- ✓Fixed costs remain constant during the period being analyzed.
- ✓Selling price per unit stays the same for every unit sold.
- ✓Variable cost per unit stays constant across all units.
- ✓All units produced are sold within the same period.
- ✓The estimate excludes taxes, financing costs, and demand changes.
Limitations
- !Results may not reflect volume discounts, bulk pricing, or tiered costs.
- !The formula assumes one consistent product or an average unit economics figure.
- !It does not account for inventory timing, returns, or unsold stock.
- !A break-even point is not meaningful if selling price per unit is equal to or less than variable cost per unit.
Common Mistakes to Avoid
Using total variable costs instead of variable cost per unit.
Forgetting to round up units when planning actual sales targets.
Mixing monthly fixed costs with annual sales prices or annual unit volumes.
Ignoring shipping, packaging, commissions, or direct labor in variable costs.
Using a selling price before discounts when actual average selling price is lower.
Related Formulas
Frequently Asked Questions
What is the basic break-even formula?
The basic formula is fixed costs divided by contribution margin per unit, where contribution margin per unit equals selling price per unit minus variable cost per unit.
How do you calculate break-even revenue?
Break-even revenue is fixed costs divided by the contribution margin ratio. The ratio is contribution margin per unit divided by selling price per unit.
Why is contribution margin important in break-even analysis?
Contribution margin shows how much each unit or sales dollar contributes toward covering fixed costs. Without it, you cannot estimate the break-even point.
What happens if selling price equals variable cost?
The contribution margin becomes zero, so no sales amount can cover fixed costs under the basic formula.
Should break-even units be rounded?
Yes. The formula may return decimals, but businesses usually round up to the next whole unit to fully cover costs.
Can target profit be included in the formula?
Yes. Add target profit to fixed costs, then divide by contribution margin per unit or contribution margin ratio.
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