How it works
Fixed costs (rent, salaries) stay the same no matter how much you sell. Variable costs (materials, packaging, payment fees) grow with each unit. Each sale contributes price minus variable cost toward the fixed costs — that contribution is called the contribution margin.
You break even when total contribution covers the fixed costs. Sell fewer units than the break-even point and you lose money; sell more and every extra unit is profit (before tax).
Formula
Break-even units = fixed costs ÷ (price per unit − variable cost per unit). Break-even revenue = break-even units × price per unit.
What each input means
- Fixed costs: Costs that do not change with sales: rent, salaries, insurance, software subscriptions.
- Variable cost per unit: The cost of making or delivering one unit: materials, packaging, shipping, payment fees.
- Price per unit: What you charge for one unit.
Worked example: fixed costs $10,000, variable cost $15, price $25
- Contribution per unit: $25 − $15 = $10
- Break-even units: $10,000 ÷ $10 = 1,000 units
- Break-even revenue: 1,000 × $25 = $25,000
- Sell 1,001 units and you are in profit; sell 999 and you are in loss.
Frequently asked questions
What if the price is lower than the variable cost?
Then every sale loses money and there is no break-even point — you must raise the price or cut the variable cost before you sell anything.
Does this include tax?
No. Break-even here is before tax. After tax you need a few more sales to cover the tax on the profit.
How do I lower my break-even point?
Three ways: cut fixed costs, cut variable cost per unit, or raise the price. Raising the price usually moves the number fastest, but it can reduce how many units you sell.
Can I use this for a service business?
Yes. Treat one client project or one hour as a “unit”: fixed costs are your monthly overhead, variable cost is what each project costs you, and price is what you charge per project.