Break-even analysis: formula and examples
The break-even point is where revenue equals total cost. Here's how to calculate it, why margin of safety matters, and when the formula breaks down.
What break-even means
The break-even point is the level of sales — measured in units or dollars — where total revenue exactly equals total cost. You're not making money, and you're not losing money. Beyond break-even, every additional sale's contribution margin flows straight to profit.
The two break-even formulas
Break-even in units
Break-even units = Fixed costs ÷ Contribution margin per unit
Where contribution margin per unit = price per unit − variable cost per unit.
Break-even in revenue
Break-even revenue = Fixed costs ÷ Contribution margin ratio
Where contribution margin ratio = contribution margin per unit ÷ price per unit (expressed as a decimal).
A worked example
You run a small candle business:
- Fixed costs (rent, salary, software): $5,000/month
- Variable cost per candle (wax, wick, jar, label): $4
- Selling price per candle: $20
Contribution margin per candle: $20 − $4 = $16. Contribution margin ratio: $16 ÷ $20 = 80%.
- Break-even units: $5,000 ÷ $16 = 312.5 → round up to 313 candles
- Break-even revenue: $5,000 ÷ 0.80 = $6,250
You need to sell 313 candles a month to cover costs. Candle 314 starts contributing $16 to profit.
Use our free break-even calculator to model your scenario, then download a PDF of the results.
Target profit break-even
To find how many units it takes to reach a specific profit target:
Target units = (Fixed costs + Target profit) ÷ Contribution margin per unit
Continuing the example: to clear $2,000 in profit, target units = ($5,000 + $2,000) ÷ $16 = 437.5 → 438 candles.
What break-even doesn't tell you
Break-even is a snapshot of one cost structure at one price. It doesn't tell you:
- Whether the market will buy at that price. 313 candles a month sounds achievable; 3,000 might not be, even if the math works.
- What happens at scale. If you'll need to hire help at 1,000 units, your fixed costs jump and your break-even resets.
- Cash timing. Break-even is accounting profit, not cash. You can hit break-even and still run out of cash if payment terms are bad.
- Whether the contribution margin is durable. Suppliers raise prices; platforms raise fees; ad costs creep up.
Margin of safety
Once you know break-even, the margin of safety tells you how much sales can drop before you're losing money:
Margin of safety = (Current sales − Break-even sales) ÷ Current sales
If you're selling 500 candles and break-even is 313, your margin of safety is (500 − 313) ÷ 500 = 37.4%. Sales could drop 37% before you'd hit a loss. Healthy businesses typically aim for 30%+ margin of safety.
When the contribution margin is negative
If price ≤ variable cost per unit, there is no break-even. Every unit you sell deepens the loss. You can't volume your way out — you have to raise price or cut variable cost.
Frequently asked
What's the difference between break-even and profitability?
Break-even is the threshold where revenue equals cost — zero profit. Profitability requires consistently exceeding break-even with healthy contribution margin. A business hitting break-even exactly is precariously placed.
Should I include taxes in break-even?
Standard break-even is pre-tax. If you want after-tax break-even for a profit target, divide the target by (1 − tax rate) before plugging into the formula.
Can I have multiple break-even points?
Yes — if fixed costs step up at certain volumes (hiring, equipment), or if pricing changes by tier, you have multiple break-even thresholds. Model each cost regime separately.