Break-Even Analysis in 12 Minutes
Break-even is the sales level where profit is exactly zero: revenue covers every fixed and variable cost, and nothing is left over. Each unit sold chips in its contribution margin toward fixed costs. Once fixed costs are covered, every extra unit is profit.
What you will learn
- What contribution margin per unit is and why it drives break-even
- How to find the break-even point in units
- How to convert break-even units into break-even sales dollars
- How to find the units needed to hit a target profit
The formulas
- FC
- total fixed costs
- P
- selling price per unit
- VC
- variable cost per unit
- P − VC
- contribution margin per unit
- FC
- total fixed costs
- CM ratio
- contribution margin as a share of price
- Target profit
- operating profit you want to earn
Worked example
A company sells a product for $50. Variable cost is $30 per unit and fixed costs are $40,000 a year. What is the break-even point in units and in sales dollars?
- Contribution margin per unit = $50 − $30 = $20.
- Break-even units = $40,000 ÷ $20 = 2,000 units.
- Break-even sales = 2,000 × $50 = $100,000.
- Check with the CM ratio: $20 ÷ $50 = 40%, and $40,000 ÷ 0.40 = $100,000.
- Bonus: to earn $20,000 profit, sell ($40,000 + $20,000) ÷ $20 = 3,000 units.
Answer: Break-even is 2,000 units, or $100,000 in sales.
Common questions
What is the formula for the break-even point?
Break-even units equal total fixed costs divided by contribution margin per unit, which is price minus variable cost per unit. For break-even in sales dollars, divide fixed costs by the contribution margin ratio instead.
How do you calculate break-even point in sales dollars?
Divide total fixed costs by the contribution margin ratio, which is contribution margin per unit divided by price. You can also multiply break-even units by the selling price. Both methods give the same answer.
What is contribution margin in break-even analysis?
Contribution margin is what each unit leaves over after paying its own variable cost. That leftover goes first toward covering fixed costs. Once fixed costs are fully covered, contribution margin becomes profit.
What happens to break-even if fixed costs go up?
Break-even rises. With the same contribution margin per unit, you need to sell more units to cover the bigger fixed cost bill. Raising price or cutting variable cost works the other way and lowers break-even.