How to use the break-even calculator
- Enter fixed costs for a period, such as a month: costs that stay the same however much you sell, like rent, salaries, insurance and software subscriptions.
- Enter the price and variable cost per unit. Variable costs rise with each sale: materials, packaging, shipping, payment fees and sales commissions.
- Optionally enter a target profit and your expected sales for the same period.
The calculator opens on the Hicks Manufacturing example from the open textbook Principles of Accounting, Volume 2: Managerial Accounting from OpenStax: a birdbath that sells for $100, costs $20 a unit to make, and carries $18,000 of monthly fixed costs.
The break-even formula
break-even units = fixed costs ÷ contribution margin per unit
contribution margin ratio = contribution margin ÷ price
break-even sales = fixed costs ÷ contribution margin ratio
Each unit sold contributes its contribution margin toward fixed costs. For Hicks, $100 − $20 = $80 a unit, so it takes $18,000 ÷ $80 = 225 birdbaths to cover the month’s fixed costs. OpenStax points out that Hicks won’t begin to show a profit until it sells the 226th unit.
The contribution margin ratio is $80 ÷ $100 = 80%: each sales dollar contributes 80 cents. Break-even sales are $18,000 ÷ 0.80 = $22,500, which is 225 units at $100.
When the answer isn’t a whole number, round up. With $1,000 of fixed costs and a $6 contribution margin, 166.67 units isn’t enough; you need 167.
Units needed for a profit target
To earn a profit instead of just breaking even, add the target to the fixed costs:
For Hicks to earn $10,000 a month, it needs ($18,000 + $10,000) ÷ $80 = 350 birdbaths, or $35,000 of sales. Every unit beyond 225 adds $80 of profit, so the extra $10,000 takes 125 more units.
The target here is profit before income tax. If you think in after-tax terms, enter the before-tax amount that leaves you the figure you want.
Margin of safety
The margin of safety is how far sales could fall before you start losing money:
If Hicks expects to sell 300 birdbaths, it is 75 units above break-even, a 25% margin of safety. Sales could drop by a quarter before the month turns into a loss. At 300 units, profit is 300 × $80 − $18,000 = $6,000.
A thin margin of safety means a slow month or a lost customer can wipe out the profit. It is a useful number to check before you commit to a new fixed cost, such as a lease or a hire.
What if the price or costs change?
OpenStax section 3.3 uses the same model for sensitivity analysis: change one input and see how break-even moves. Starting from the Hicks example:
- Price up to $110: contribution margin $90, break-even 200 units.
- Variable cost up to $30: contribution margin $70, break-even 257.1, so 258 units.
- Fixed costs up to $20,000: break-even 250 units.
Because the contribution margin is the denominator, small changes in price or unit cost move the break-even point more than equal-sized changes in fixed costs. A 10% price rise cut break-even by 25 units; a 10% rise in fixed costs added 25 units. A price change also affects how many you sell, which the formula can’t predict, so test a few scenarios.
Sorting fixed and variable costs
The answer is only as good as the split between fixed and variable costs. A cost is variable if it goes up with each unit sold and fixed if it stays the same over the range of volume you are considering. Some costs are a mix, such as a phone plan with a base fee and per-minute charges; split them into their fixed and variable parts.
Fixed costs are fixed only within a range. If selling 500 birdbaths a month means renting a second workshop, break-even beyond that point needs the higher fixed cost.
Payment processing fees, marketplace commissions and free-shipping costs are easy to forget and belong in the variable cost per unit. Leaving them out makes break-even look lower than it is.
More than one product
The calculator models one product. With several products, the usual approach is a weighted-average contribution margin based on the sales mix: if 60% of units are a $30-margin item and 40% a $50-margin item, the average is 0.6 × 30 + 0.4 × 50 = $38 a unit, and break-even units are fixed costs ÷ 38, split 60/40. Enter $38 as the price and $0 as the variable cost to use that average here. If the mix shifts toward the lower-margin item, break-even rises.
Finding a break-even price
The formula can be turned around to find the lowest price that covers costs at a given volume:
If Hicks expects to sell 300 birdbaths a month, the break-even price is $20 + $18,000 ÷ 300 = $80. Any price above that makes a profit at that volume, and the gap is the profit per unit. Try the price in the calculator to confirm that break-even units equal the expected volume.
Is a cost-saving investment worth it?
The same thinking applies to an investment that lowers variable cost. If a $6,000 machine cuts the cost of each birdbath from $20 to $15, it pays for itself after 6,000 ÷ 5 = 1,200 units. At 300 units a month, that is four months. Enter the new variable cost to see how the break-even point and margin of safety change once the machine is paid off, and add its cost to fixed costs to see the picture while you are still paying for it.
Break-even for a service business
For services, a unit can be an hour, a job or a client. A cleaning business with $4,000 of monthly fixed costs that charges $45 an hour and spends $15 an hour on supplies and pay has a contribution margin of $30 an hour, so it breaks even at 4,000 ÷ 30 = 133.3, or 134 billed hours a month.
Sources & assumptions
How this calculator gets its numbers. Full method: our methodology.
- One product, with a constant price and variable cost per unit over the volume considered.
- Fixed costs stay the same within that volume; break-even units = fixed costs ÷ (price − variable cost), rounded up to a whole unit.
- Break-even sales = fixed costs ÷ contribution margin ratio; target profit is before income tax.
- Margin of safety = expected units − break-even units.
Sources
- OpenStax (Rice University), Principles of Accounting, Volume 2, 3.1 Explain Contribution Margin. Contribution margin per unit = sales price − variable cost per unit, and the contribution margin ratio = contribution margin ÷ price.
- OpenStax (Rice University), Principles of Accounting, Volume 2, 3.2 Calculate a Break-Even Point in Units and Dollars. Hicks Manufacturing: $18,000 of fixed costs ÷ $80 contribution margin = 225 units, and ÷ an 80% contribution margin ratio = $22,500 of sales.
- OpenStax (Rice University), Principles of Accounting, Volume 2, 3.3 Perform Break-Even Sensitivity Analysis. Sensitivity analysis shows what happens to break-even when the price, units sold, variable cost per unit or fixed costs change.
Last reviewed . Re-run the numbers when a new fixed cost, such as a lease or a hire, changes the cost structure.
Frequently asked questions
How do you calculate the break-even point?
Divide fixed costs by the contribution margin per unit, which is the price minus the variable cost per unit. With $18,000 of fixed costs, a $100 price and a $20 variable cost: $18,000 ÷ $80 = 225 units.
How do I find break-even in sales dollars?
Divide fixed costs by the contribution margin ratio. With an 80% ratio and $18,000 of fixed costs, break-even sales are $18,000 ÷ 0.80 = $22,500.
What is contribution margin?
It is what each unit sold contributes toward fixed costs and profit: the price minus the variable cost per unit. As a share of price, it is the contribution margin ratio.
What is the margin of safety?
It is how far expected sales are above the break-even point, in units or as a percentage. Expected sales of 300 units with a break-even of 225 give a margin of safety of 75 units, or 25%.
What if my price is lower than my variable cost?
Then each sale loses money and there is no break-even point; selling more only increases the loss. Raise the price or reduce the variable cost first.
Is break-even ROAS the same thing?
It is related. Break-even ROAS asks how much ad-driven revenue each ad dollar must bring in to cover product costs, while this calculator covers fixed costs with unit sales. The ROAS calculator handles the advertising version.