Break-Even Analysis: How to Calculate It, With a Worked Example
Break-even analysis tells you how much you need to sell before revenue covers all your costs and profit is zero.1 Sell less and you lose money; sell more and each extra unit adds its contribution margin to profit.2
| what you want | formula |
|---|---|
| Break-even units | fixed costs ÷ (price per unit − variable cost per unit) |
| Break-even sales ($) | fixed costs ÷ contribution margin ratio |
In our coffee-cart example, with assumed figures, $6,500 ÷ $3.25 = 2,000 drinks a month.
What a break-even analysis tells you
A break-even analysis gives you one number: how many units, or how many dollars of sales, you need in a period before the business stops losing money. You can read the result three ways:
- Sales below the break-even point: a loss.
- Sales at the break-even point: zero profit.
- Sales above the break-even point: each extra unit adds its contribution margin to profit.
On a break-even chart, the fixed-cost line runs flat at your monthly fixed costs, which in our example are an assumed $6,500. The total-cost line starts at that level and rises by the variable cost of each unit, while the revenue line starts at zero and rises by the price of each unit. Where they cross is the break-even point: you lose money to the left of it and make a profit to the right.
In our coffee-cart example, with assumed figures, revenue rises $5.00 per drink, total cost starts at $6,500 and rises $1.75 per drink, and the two lines cross at 2,000 drinks and $10,000 in sales.
The break-even formulas
Our method uses the same five formulas every time. Keep every input on the same period: monthly fixed costs give monthly break-even units.
| formula | what it gives |
|---|---|
| Unit contribution margin = price − variable cost per unit | dollars each unit adds toward fixed costs |
| CM ratio = unit contribution margin ÷ price | share of each sales dollar left after variable cost |
| Break-even units = fixed costs ÷ unit contribution margin | the volume where profit is zero |
| Break-even sales ($) = fixed costs ÷ CM ratio | the same point in dollars |
| Units for a target profit = (fixed costs + target profit) ÷ unit contribution margin | your sales target |
The units and dollar formulas come from the SBA’s guide,1 and the target-profit formula is the standard extension of the units formula.3 Round break-even units up to the next whole unit, because you cannot sell part of one.4
The variables, one line each:
- Fixed costs: costs that stay the same in the period whatever you sell (rent, insurance, salaries, loan payments).
- Price: what the customer pays per unit, after discounts.
- Variable cost per unit: the cost of making or delivering each extra unit, for example materials, packaging, card fees and commissions.
- Target profit: the profit you want for the period, in dollars.
A sixth line converts units into time. Time to break even = break-even units ÷ expected units per day (or per month, if your fixed costs cover a longer period). State the period every time you quote the result.
Contribution margin: the number that drives the result
The contribution margin exists in two forms, and the formulas need both.
| measure | formula | coffee cart, example by our method |
|---|---|---|
| Unit contribution margin | price − variable cost per unit | $5.00 − $1.75 = $3.25 (assumption) |
| Contribution margin ratio | unit contribution margin ÷ price | $3.25 ÷ $5.00 = 65% (assumption) |
The unit margin is in dollars per unit, so it divides fixed costs into units. The ratio is a percentage of sales, so it divides fixed costs into sales dollars.1 Use the ratio when you sell many items at different prices: it works on sales dollars and needs no single unit price.
Keep both per unit. Subtracting total monthly variable cost from a unit price mixes two scales and gives a meaningless number.
How to do a break-even analysis in 5 steps
One example runs through every step: a mobile coffee cart that sells drinks and pays fixed costs monthly. Every input below is our assumption.
| input (assumption) | value |
|---|---|
| Price per drink | $5.00 |
| Variable cost per drink (cup, beans, milk) | $1.75 |
| Fixed costs a month (permit, insurance, cart lease, owner’s base pay) | $6,500 |
| Expected sales | 2,400 drinks a month |
| Trading days | 25 a month |
Step 1. Sort fixed, variable and mixed costs
Put every cost in one of three columns before you calculate.
| fixed | variable | mixed or step |
|---|---|---|
| Permit, insurance, cart lease | Cups, lids, beans, milk | Generator fuel: a base for idling plus a part per drink |
| Owner’s base pay | Card processing fees | A second barista, hired only above a set daily volume |
A mixed cost such as utilities has a fixed base and a usage part that rises with output. Filing all of it in one column distorts the result, so split it first.5 Add the base to fixed costs and the per-unit part to variable cost. A step cost is fixed within a volume range, so price it at the range you expect to sell in.
Step 2. Find the contribution margin
In our example, with assumed figures, the unit contribution margin is $5.00 − $1.75 = $3.25 per drink, a 65% ratio.
Step 3. Calculate break-even units
In our example, with assumed figures, $6,500 ÷ $3.25 = 2,000 drinks a month, or 80 a day, assuming 25 trading days. If the division leaves a fraction, round up.4
Step 4. Calculate break-even sales in dollars
In our example, with assumed figures, $6,500 ÷ 0.65 = $10,000 a month.
Cross-check: break-even units × price must equal fixed costs ÷ CM ratio, before rounding. In our example, with assumed figures, 2,000 × $5.00 = $10,000, so the two methods give the same answer. If the two routes give different numbers, one of your inputs is wrong.
Step 5. Find the time and the margin of safety
The margin of safety is (expected sales − break-even sales) ÷ expected sales.6 For the cart in our example (assumed figures), (2,400 − 2,000) ÷ 2,400 = 16.7%, so sales can fall by about one sixth before the month turns into a loss.
Time works within the month. In our example, we assume 2,400 drinks over 25 days, or 96 a day; 2,000 ÷ 96 = 20.8, so the cart covers its fixed costs on day 21 of 25. In our example, with assumed figures, 2,400 drinks give a profit of (2,400 − 2,000) × $3.25 = $1,300.
To repeat these steps on your own costs, run your own numbers in the unit economics calculator.
What-if table: how price, costs and rent move the point
Change one input per row and recalculate from a base of 2,000 drinks a month; every figure is an assumption from our example.
| change (assumption) | unit contribution margin | new break-even | against base |
|---|---|---|---|
| Price $4.50 (−10%) | $2.75 | 2,364 | +364 (+18.2%) |
| Price $5.50 | $3.75 | 1,734 | −266 |
| Variable cost $2.00 | $3.00 | 2,167 | +167 |
| Fixed costs $7,500 | $3.25 | 2,308 | +308 |
| Target profit $3,000 | $3.25 | 2,924 | +924 |
In our example, with assumed figures, a 10% price cut needs 18.2% more drinks just to break even, because the whole cut comes out of the $3.25 margin. Before you discount, check whether volume can rise by more than that.
Only two things shift the break-even point: fixed costs and the unit margin (price minus variable cost).7 Cutting costs or raising the price lowers it; more sales carry you past it but leave it where it is.
To back-solve, put the profit formula in a spreadsheet and use Excel’s Goal Seek: set the profit cell to 0 by changing the one input cell you want to solve for.8 For price, it returns the exact price that breaks even at a given volume.
When to run one and what it decides
Founders run one before launch, owners run one for a loan request, and anyone pricing a new product runs one before the first sale. Lenders expect it: SBA loan guidance lists a break-even analysis alongside the expense budget and sales forecast in the business plan.9 It fits in your business plan’s financial section, and the business plan template has a place for it.
Each use is a decision:
- Price: the minimum volume each candidate price needs.
- Launch: whether the volume you need is one you can sell.
- Hire: how many extra units a new salary requires.
- Lease: how many units a higher rent adds to the break-even point.
- Loan: how many units a monthly repayment adds before you take it.
Recalculate when you add a product, change a price, sign a new lease or wage agreement, or see a supplier raise costs. Compare the actual monthly volume against your estimate each quarter. If you are starting a business, run it again once you have three months of real cost data.
What the break-even point does not tell you
Standard break-even analysis assumes a constant selling price, costs that are linear within the relevant range and a constant sales mix.10 Each assumption breaks somewhere. Here is what to do about each one:
- Constant price. Discounts and volume deals lower the average price. Use the average you expect to collect.
- Linear costs. Bulk buying lowers variable cost; overtime raises it. Recalculate for each volume range.
- One sales mix. For several products, use a weighted-average contribution margin based on the sales mix.11 If the cart sells 80% drinks at a $3.25 margin and 20% pastries at a $1.50 margin, the weighted margin is 0.8 × $3.25 + 0.2 × $1.50 = $2.90, and break-even is $6,500 ÷ $2.90 = 2,242 items a month (example by our method, assumptions).
- No demand guarantee. The formula says how many units you need, not whether buyers exist. Size your market, read our guide to market analysis in our Guides, check the idea first or test demand before you commit.
- No timing or cash. The model leaves out ramp-up months, and it ignores inventory and payment terms. Model them month by month in your business plan’s financial section.
- Static inputs. The result is only as current as your cost list. Recalculate on every trigger listed above.
Four mistakes that skew the result
- Treating revenue past break-even as profit. Profit grows by the contribution margin per unit.2 At 2,400 drinks the cart earns 400 × $3.25 = $1,300; 400 × $5.00 = $2,000 overstates it (example by our method, assumptions).
- Dividing by the unit margin to get dollars. The dollar formula uses the CM ratio: in our example, with assumed figures, $6,500 ÷ $3.25 gives drinks and $6,500 ÷ 0.65 gives dollars.
- Expecting more sales to lower the break-even point. Volume does not appear in the formula.7
- Filing a mixed cost as all fixed or all variable. Split it into its base and its per-unit part.5
FAQ
What is the break-even point formula?
How do I calculate break-even in sales dollars?
Divide fixed costs by the contribution margin ratio, which is (price − variable cost per unit) ÷ price.1 Check it against break-even units × price.
What is the difference between contribution margin and the contribution margin ratio?
The contribution margin is dollars per unit (price minus variable cost). The ratio is that margin divided by price, a percentage of each sales dollar. The margin gives units; the ratio gives dollars.
Does selling more lower my break-even point?
No. The break-even point depends only on fixed costs and on the margin per unit, which is price minus variable cost per unit.7 Selling more raises profit above the point.
Is all revenue after break-even profit?
No. Each unit past break-even adds its contribution margin to profit.2 The rest of its price covers its own variable cost.
How do I do break-even analysis with several products?
Weight each product’s contribution margin by its share of sales and divide fixed costs by the weighted margin.11 Recalculate when the mix changes.
How long will it take to break even?
Divide break-even units by the units you expect to sell per day or per month. Keep fixed costs on the same period, and state that period with the answer.
What are the limitations of break-even analysis?
It assumes that price stays constant and costs stay linear, with a fixed sales mix.10 It also ignores demand and cash timing and does not show what happens when inputs change, so pair it with a market size estimate and a monthly cash plan.
Sources
- sba.gov, 10/23/2026
- financestrategists.com, 10/23/2026
- farhatlectures.com, 10/23/2026
- math.libretexts.org, 10/23/2026
- wiss.com, 10/23/2026
- gocardless.com, 10/23/2026
- patriotsoftware.com, 10/23/2026
- dfwexcel.com, 10/23/2026
- guidantfinancial.com, 10/23/2026
- courses.lumenlearning.com, 10/23/2026
- highered.mheducation.com, 10/23/2026
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