The Break-Even Formula
Break-even point (units) = Fixed Costs ÷ (Selling Price − Variable Cost per Unit). The difference between selling price and variable cost is called the contribution margin — each unit sold contributes this amount toward covering fixed costs. Once fixed costs are fully covered, every additional unit sold generates pure profit.
A Worked Example
Suppose you run a cake business. Fixed costs (rent, insurance, equipment): $3,000/month. You sell cakes at $40 each, and ingredients cost $12 per cake. Contribution margin = $40 − $12 = $28 per cake. Break-even = $3,000 ÷ $28 = 107 cakes per month. If you sell 108 cakes, you make $28 profit. If you sell 200 cakes, you make $2,824 profit.
Why Break-Even Analysis Matters
Knowing your break-even point tells you: whether your pricing is viable, how many clients or sales you need to cover costs, how changes in fixed costs (hiring, new premises) affect your minimum sales requirement, and what safety margin you have before losing money. Every business owner should know this number before committing to new expenses.
Key Takeaways
- Don't rely on gut feeling — use numbers and a clear formula
- Review and adjust your figures at least once per year as costs and market rates change
- Use our free calculator above to apply these concepts to your specific situation
- Compare your results against industry benchmarks and adjust accordingly