Quick summary
Break-even analysis shows the minimum sales level required to cover the costs included in the calculation.
- The break-even point is where total revenue equals total costs.
- Below break-even, the business has an operating loss. Above it, the business begins generating operating profit.
- Break-even units equal fixed costs divided by contribution margin per unit.
- Break-even revenue equals fixed costs divided by the contribution-margin ratio.
- The calculation should be updated when prices, variable costs, payroll or fixed overhead change.
How much does your business need to sell before it starts making money?
Revenue alone cannot answer that question. You also need to understand fixed costs, variable costs and the amount each sale contributes toward overhead and profit.
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 is not generating an operating profit or loss under the assumptions used.
BDC describes break-even as the minimum revenue needed to cover costs. A break-even analysis then tests how that threshold changes when pricing, costs or sales assumptions change.
What information do you need?
Fixed costs
Fixed costs do not change directly with each unit sold within the relevant range of activity. Examples may include:
- Rent
- Administrative salaries
- Insurance
- Base software subscriptions
- Professional services
- Property taxes
- Equipment leases
Some costs are fixed only within a particular range. A business may need another location, supervisor or software tier after reaching a certain volume.
Variable costs
Variable costs change with sales or production volume. Examples may include:
- Materials
- Inventory sold
- Packaging
- Sales commissions
- Payment-processing fees
- Direct subcontractors
- Shipping or delivery tied to each sale
Contribution margin
Contribution margin is the amount from each sale available to cover fixed costs and then create profit.
Contribution margin per unit = Selling price − Variable cost per unit
Break-even point formula in units
Break-even units = Fixed costs ÷ Contribution margin per unit
Product-business example
A business sells a product for $80. The variable cost is $48, and monthly fixed costs are $32,000.
Contribution margin per unit:
$80 − $48 = $32
Break-even units:
$32,000 ÷ $32 = 1,000 units
The business must sell 1,000 units per month to cover the fixed and variable costs included in the calculation.
Break-even point formula in revenue
When a business sells multiple products or services, calculating a sales-dollar target may be more useful.
Contribution margin ratio = (Revenue − Variable costs) ÷ Revenue
Break-even revenue = Fixed costs ÷ Contribution margin ratio
Service-business example
A consulting company expects monthly revenue of $100,000 and variable delivery costs of $35,000. Fixed monthly costs are $45,000.
Contribution margin ratio:
($100,000 − $35,000) ÷ $100,000 = 65%
Break-even revenue:
$45,000 ÷ 65% = approximately $69,231
The company needs approximately $69,231 in monthly revenue to cover the fixed and variable costs used in the calculation.
How to calculate break-even billable hours
A service business can use billable hours instead of product units.
Assume:
- Average billing rate: $150 per hour
- Variable delivery cost: $60 per hour
- Monthly fixed costs: $36,000
Contribution margin per hour:
$150 − $60 = $90
Break-even hours:
$36,000 ÷ $90 = 400 billable hours
The company needs 400 billable hours for the month, assuming the average rate and cost remain accurate.
Break-even point versus profit target
Break-even covers costs but does not provide the return owners may require. To calculate the sales needed for a target operating profit:
Required units = (Fixed costs + Target profit) ÷ Contribution margin per unit
Using the product example, assume the business wants a monthly operating profit of $16,000:
($32,000 + $16,000) ÷ $32 = 1,500 units
The business needs to sell 1,500 units to reach that target under the stated assumptions.
How changes affect break-even
| Change | Likely effect on break-even |
|---|---|
| Higher selling price | Lowers break-even if volume and variable costs remain stable |
| Higher variable cost | Raises break-even |
| Higher fixed costs | Raises break-even |
| Improved production efficiency | Can lower break-even |
| More discounting | Usually raises break-even |
| Shift toward stronger-margin sales | Can lower break-even |
Use a sensitivity analysis
A single break-even result can create false confidence. Test several scenarios:
- Expected price and expected costs
- Lower sales price or heavier discounts
- Higher material or labour cost
- New employee or location
- Lower sales volume
- Different product or service mix
BDC recommends using sensitivity analysis to see how changes in key assumptions affect break-even and profitability.
When break-even analysis is useful
- Setting sales targets
- Launching a product or service
- Reviewing a price increase
- Evaluating a new hire
- Opening another location
- Comparing supplier options
- Planning for rising costs
- Determining whether a project is financially viable
Limitations of break-even analysis
Break-even analysis simplifies reality. Results can be misleading when:
- Prices change at different sales volumes
- Costs are not clearly fixed or variable
- The sales mix changes significantly
- Demand is lower than assumed
- Capacity limits require additional fixed costs
- Customer collections do not match recorded revenue
- Taxes, financing, owner compensation or capital spending are excluded
Break-even is a profitability tool, not a complete cash-flow forecast. A business can exceed break-even and still be short of cash if customers pay late, inventory grows or debt payments are high.
How to lower your break-even point
- Increase prices where the market and value support it
- Reduce variable costs without reducing quality
- Improve labour productivity
- Reduce waste, rework and unbilled work
- Review fixed overhead
- Renegotiate supplier agreements
- Shift the sales mix toward stronger-margin work
- Delay fixed-cost expansion until demand is established
Why current bookkeeping matters
A break-even calculation is only as reliable as the cost information underneath it. Supplier bills, payroll, materials, subcontractors, software and overhead need to be complete and categorized consistently.
Agile keeps bookkeeping current and provides financial reports with CPA oversight, helping owners understand their cost structure before making pricing, hiring and growth decisions. Learn more about Agile’s bookkeeping services or use the pricing page to explore support for your business.
Know the sales target behind the goal
Agile keeps costs and expenses organized so pricing and break-even decisions can start with more reliable information.
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Sources and further reading
This article provides general educational information. It is not financial, tax or legal advice for a specific business.