What break-even tells you
Each sale contributes something toward fixed costs once its own variable cost is paid. Break-even is the point where those contributions add up to the whole fixed bill. The next sale after that is the first one that produces profit.
It is most useful for decisions: whether a new hire is worth it, whether a price cut makes sense, or whether a new location could ever pay for itself. Change one input at a time and see how far the break-even point moves.
The formulas
Contribution per unit
Contribution = Selling price − Variable cost
Break-even units
Break-even units = Fixed costs ÷ Contribution
Sales for a profit goal
Units needed = (Fixed costs + Profit goal) ÷ Contribution
Worked example
A small studio has $6,000 of monthly fixed costs and sells a product at $50 with a $20 variable cost. It wants $3,000 of monthly profit.
- Contribution: $50 − $20 = $30.00 per unit, a 60% ratio.
- Break-even: $6,000 ÷ $30 = 200 units, or $10,000.00 of revenue.
- Profit goal: ($6,000 + $3,000) ÷ $30 = 300 units, or $15,000.00 of revenue.
Using break-even when you sell many products
The formula assumes one price and one variable cost. If you sell a mix, enter your average sale value and average variable cost per sale. Those averages shift if your mix changes, so a business that moves toward lower-margin products will need more sales than the same calculation showed before.
Service businesses can treat one billable hour or one typical project as the unit. Results are rounded up to whole units, since you cannot sell a fraction of most things.
Frequently asked questions
Should I pay myself as a fixed cost?
Include your target pay if you want the break-even point to mean the business is sustainable. Leave it out and the figure shows only when the business stops consuming cash while you work for free.
What counts as fixed and what counts as variable?
Ask whether the cost would change if you sold one more unit. Rent would not, so it is fixed. Materials and card fees would, so they are variable. Some costs are mixed, so split them as best you can.
What does it mean if the calculator says I cannot break even?
Your price is at or below your variable cost, so more sales only add to the loss. Raise the price or lower the variable cost before worrying about volume.
Does this include taxes?
No. The profit goal here is before income taxes. If you have a take-home figure in mind, set the goal high enough to cover what you expect to owe.