A break-even analysis tells you how much you need to sell to cover all your costs, so that profit is exactly zero. The break-even point formula is fixed costs divided by contribution margin per unit, which gives you break-even in units. Divide fixed costs by the contribution margin ratio instead and you get break-even in sales dollars. Below that point you lose money; above it, every sale adds to profit.
Below: how to calculate the break-even point step by step, a worked example, margin of safety, target profit, how to present it in a business plan, and its limits.
What is a break-even analysis?
BDC defines the break-even point as “the level of sales where a business’s total revenue equals its total expenses.” The SBA describes it the same way: the point where total cost and total revenue are equal, with no loss or gain.
The break-even point is a single number. A break-even analysis is the wider exercise: working out that number, then testing how it moves when price, costs or volume change.
You need three inputs:
- Your fixed costs for a period (usually a month or a year)
- Your selling price per unit
- Your variable cost per unit
Fixed costs vs variable costs
Getting this split right matters more than the formula.
Fixed costs stay the same whether you sell a lot or nothing at all. BDC’s glossary entry on fixed costs defines one as “an expense that does not change when sales or production volumes increase or decrease.” Typical examples are rent, salaries, insurance, property taxes and interest.
Variable costs rise and fall with each sale. BDC’s entry on variable costs defines one as “an expense that changes with the amount of goods produced or services provided,” with examples such as raw materials and supplies, direct labor, commissions, credit card fees, packaging and distribution.
Semi-variable costs have a fixed part and a variable part, like a phone plan with a base fee plus usage charges. BDC covers these under semi-variable costs. For break-even purposes, the SBA recommends separating them into their fixed and variable parts where you can.
Use the same period for everything: if fixed costs are monthly, convert quarterly bills (divide by three) and annual ones (divide by twelve). And include your own pay. If you need a salary, it is a fixed cost, and leaving it out makes break-even look closer than it is.
The break-even point formula
Both versions start with the contribution margin, what each sale leaves over after its own variable costs to pay for fixed costs:
Contribution margin per unit = selling price per unit − variable cost per unit
Contribution margin ratio = contribution margin per unit ÷ selling price per unit
Break-even point in units = fixed costs ÷ contribution margin per unit
Break-even point in sales dollars = fixed costs ÷ contribution margin ratio
These match the formulas on the SBA’s business planning page, which has a free break-even point calculator.
BDC writes the dollar formula as indirect costs divided by gross margin percentage. That gives the same answer when your cost of sales holds all your variable costs. If some (card fees, commissions, shipping) sit below gross margin, use the contribution margin ratio so they are counted.
How to calculate the break-even point, step by step
- List your fixed costs for one month.
- Work out the variable cost per unit: everything you spend to make and deliver one unit.
- Set your selling price per unit, before sales tax.
- Calculate the contribution margin per unit and as a ratio.
- Divide fixed costs by the margin per unit for units, and by the ratio for sales dollars.
- Round units up. Rounding down leaves you just short.
- Check it by multiplying back out, then compare it with your forecast and capacity.
Break-even analysis example
Example: a made-up candle studio called Lantern & Wick. All numbers are invented for illustration.
The owner sells hand-poured candles from a rented workshop and online, and works in monthly figures.
Step 1: Fixed costs
| Monthly fixed cost | Amount |
|---|---|
| Workshop rent | $1,800 |
| Owner’s salary | $3,000 |
| Insurance | $150 |
| Website and software | $150 |
| Marketing | $600 |
| Utilities (base charges) | $200 |
| Bookkeeping | $100 |
| Total fixed costs | $6,000 |
Check: 1,800 + 3,000 = 4,800; + 150 = 4,950; + 150 = 5,100; + 600 = 5,700; + 200 = 5,900; + 100 = 6,000.
Step 2: Variable cost per candle
| Variable cost per candle | Amount |
|---|---|
| Wax and fragrance | $5.50 |
| Jar and lid | $3.00 |
| Wick and label | $1.00 |
| Packaging | $1.50 |
| Payment processing | $1.00 |
| Total variable cost | $12.00 |
Check: 5.50 + 3.00 + 1.00 + 1.50 + 1.00 = 12.00.
Step 3: Contribution margin
The selling price is $30 per candle.
- Contribution margin per unit: $30 − $12 = $18
- Contribution margin ratio: $18 ÷ $30 = 0.60, or 60%
Step 4: Break-even point
- In units: $6,000 ÷ $18 = 333.33, rounded up to 334 candles a month
- In sales dollars: $6,000 ÷ 0.60 = $10,000 a month
The two answers agree: 333.33 × $30 = $10,000. Rounding up to 334 candles gives sales of 334 × $30 = $10,020.
Step 5: Check the result
| At 334 candles | Amount |
|---|---|
| Sales (334 × $30) | $10,020 |
| Variable costs (334 × $12) | −$4,008 |
| Contribution margin (334 × $18) | $6,012 |
| Fixed costs | −$6,000 |
| Profit | $12 |
Profit is $12, not zero, only because of rounding up. At exactly $10,000 of sales, variable costs are 40% of sales ($4,000), the contribution margin is $6,000, and profit is $0.
Margin of safety
The margin of safety is how far expected sales are above break-even: how much sales could fall before you lose money.
Margin of safety = expected sales − break-even sales
Margin of safety % = margin of safety ÷ expected sales
The candle studio forecasts 450 candles a month, or 450 × $30 = $13,500 in sales.
- Margin of safety: $13,500 − $10,000 = $3,500
- As a percentage: $3,500 ÷ $13,500 = 0.259, or about 26%
- In units: 450 − 334 = 116 candles above the rounded break-even
Sales could drop by about a quarter before the business makes a loss. A thin margin tells you, and any reader of your plan, that one slow month could do it.
Break-even with a target profit
Break-even is the floor, not the goal. To find the sales you need to earn a set profit, add that profit to fixed costs:
Units for target profit = (fixed costs + target profit) ÷ contribution margin per unit
Sales for target profit = (fixed costs + target profit) ÷ contribution margin ratio
The candle studio wants $2,400 a month of operating profit on top of the owner’s salary.
- Units: ($6,000 + $2,400) ÷ $18 = $8,400 ÷ $18 = 466.67, rounded up to 467 candles
- Sales: $8,400 ÷ 0.60 = $14,000
Check: at $14,000 of sales, contribution margin is $14,000 × 0.60 = $8,400. Subtract $6,000 of fixed costs and profit is $2,400. Her forecast of 450 candles is 17 short, so it covers costs but not the profit she wants.
This is operating profit before income tax. If you set the target as an after-tax figure, ask your accountant how to gross it up for your situation.
Test what changes the break-even point
BDC suggests treating the break-even point as a range rather than one number and running scenarios with different costs and margins. A small table does this well:
| Scenario | Contribution margin | Break-even units | Break-even sales |
|---|---|---|---|
| Base case: price $30, fixed costs $6,000 | $18 | 334 | $10,000 |
| Price cut to $28 | $16 | 375 | $10,500 |
| Price raised to $32 | $20 | 300 | $9,600 |
| Fixed costs rise to $7,000 | $18 | 389 | $11,667 |
Workings: $6,000 ÷ $16 = 375, and 375 × $28 = $10,500. $6,000 ÷ $20 = 300, and 300 × $32 = $9,600. $7,000 ÷ $18 = 388.89, rounded up to 389, and $7,000 ÷ 0.60 = $11,666.67, shown as $11,667.
A $2 price cut adds 41 candles to the monthly break-even. Findings like that are the real value of the analysis.
If you sell more than one product
Use a weighted contribution margin ratio: total expected contribution margin divided by total expected sales across all products, based on your sales mix. Divide fixed costs by that ratio to get break-even sales. It holds only if the mix stays close to forecast. The SBA also suggests calculating each product or service separately if their sales vary by month.
How to present a break-even analysis in a business plan
The SBA notes that a break-even analysis is usually a requirement when you take on investors or debt, and our CSBFP loan business plan guide lists a break-even estimate among the items to prepare. Keep it short and easy to check:
- One plain sentence in the financial section: “We break even at about 334 candles, or $10,000 of sales, a month.”
- A small inputs table with fixed costs, price, variable cost per unit and contribution margin, so a reader can redo the math.
- The margin of safety against your forecast, and the month your projections show you reaching break-even.
- The scenario table with two or three what-ifs.
- A break-even chart if you like visuals: sales and total costs plotted against units, crossing at the break-even point.
The numbers must match the rest of the plan. Fixed costs should agree with the operating expenses in your financial projections, and the time it takes to reach break-even drives how much working capital your startup costs budget needs.
Limitations of break-even analysis
- Straight lines. It assumes price and variable cost per unit stay the same at every volume. In practice you may give discounts or win bulk pricing from suppliers.
- Fixed costs are only fixed for a range. Past a certain volume you need more space, staff or equipment, and the break-even point jumps.
- Sales mix. With several products, the answer depends on a mix that may not hold.
- Profit is not cash. Break-even here means accounting profit. Loan principal repayments, inventory bought ahead of sales and slow-paying customers all tie up cash, so you can break even on paper and still run short. Use a monthly cash flow forecast alongside it.
- It says nothing about demand. The formula tells you how many units you need, not whether customers will buy them. Compare the result with your market research and your capacity.
- Estimates in, estimates out. The SBA’s business planning page says the break-even point is an estimate, and suggests adding a little extra, such as 10%, to cover miscellaneous expenses you can’t predict.
For loan or investment decisions, have an accountant review your numbers and ask the lender what format they expect.
Break-even analysis checklist
- Fixed and variable costs separated, with semi-variable costs split into both parts
- All figures for the same period (monthly or yearly)
- Your own salary included in fixed costs
- Break-even shown in units (rounded up) and in sales dollars
- Margin of safety calculated against your sales forecast
- Target-profit sales calculated, if you have a profit goal
- Two or three scenarios for price and cost changes
- Figures consistent with your projections and cash flow forecast