What break-even means
The break-even point is the number of units you need to sell (or revenue to generate) to cover all your costs. Below this point you're losing money; above it, every additional unit contributes to profit.
Break-even units = Fixed costs / (Price − Variable cost per unit) Break-even revenue = Fixed costs / Contribution margin %
Contribution margin
The difference between your selling price and variable cost is called contribution margin. It's what each unit "contributes" toward covering your fixed costs. If the contribution margin is zero or negative, you'll never break even — you need to raise your price or lower your variable costs.
Worked example
A small candle business has $5,000 a month in fixed costs (rent, software, insurance). Each candle costs $7 in wax, jars and packaging and sells for $25.
- Contribution margin per unit: $25 − $7 = $18.
- Contribution margin as a percentage: $18 ÷ $25 = 72%.
- Break-even units: $5,000 ÷ $18 = 277.8, rounded up to 278 candles a month.
- Break-even revenue: $5,000 ÷ 0.72 = $6,944.44 a month.
The revenue figure is the exact break-even point (277.8 × $25). Selling the full 278th candle takes you just past it. If you expect to sell 350 candles, you have a margin of safety of 72 units, about 21% of sales, before you start losing money.
What moves the break-even point
| Change | Contribution per unit | Break-even units |
|---|---|---|
| Starting point | $18 | 278 |
| Raise price by $2 to $27 | $20 | 250 |
| Cut variable cost by $1 to $6 | $19 | 264 |
| Cut fixed costs by $500 to $4,500 | $18 | 250 |
A price rise often has the biggest effect because all of it goes to contribution margin, but it may also reduce how many units you sell. Test each change against what your customers will realistically pay.
Planning for a profit target
To find the sales needed for a specific profit, add the target to your fixed costs before dividing. For $2,000 of monthly profit in the candle example: ($5,000 + $2,000) ÷ $18 = 388.9, so you need to sell 389 candles.
Assumptions
This model assumes selling price and variable cost per unit are constant. Real businesses often have tiered pricing and volume discounts on materials. It also ignores taxes and assumes every unit you make is sold. Treat the result as a planning estimate.