What is Break-Even Point?

The break-even point tells you how much you need to sell to cover your costs. Below it, the business loses money; above it, each additional sale contributes to profit.

The formula

Break-even sales (units) = fixed costs ÷ contribution margin per unit

Break-even sales (dollars) = fixed costs ÷ contribution margin ratio

Example

A bakery has monthly fixed costs of $18,000, including rent, salaried staff and insurance. Each $10 order has $4 of variable costs, so contribution margin is $6 per order, or 60%. Break-even is 3,000 orders, or $30,000 in monthly sales.

Uses

• Pricing: see how a price change shifts the break-even point
• Hiring: a new salaried hire raises fixed costs and the volume needed to break even
• New locations or products: estimate how long until a new venture covers its costs
• Cash planning: compare expected sales with break-even to judge risk; see cash flow basics

Limitations

The calculation assumes costs fit neatly into fixed and variable and that prices and product mix stay constant. Real businesses have step costs and changing mixes, so treat the result as an estimate and update it with actual figures.

Getting reliable inputs

Break-even analysis is only as good as the cost data behind it. Reconciled books with variable costs separated from overhead make it meaningful. Our accounting services include break-even and scenario analysis. The SBA's calculate your startup costs guidance discusses planning for new businesses.

Related terms

• Contribution Margin: Contribution margin is revenue minus variable costs, the amount each sale contributes to fixed costs and profit.

Browse more definitions in the small business glossary.