How to calculate the break-even point
Example: a business with $10,000 a month of fixed costs sells a product for $50 that costs $30 to make. Each sale contributes $20, so it needs 10,000 ÷ 20 = 500 units, or $25,000 of sales, to break even. To make $5,000 profit it needs (10,000 + 5,000) ÷ 20 = 750 units, or $37,500.
Fixed vs. variable costs
Fixed costs stay the same however much you sell: rent, salaries, insurance, software and loan payments. Variable costs rise with each sale: materials, packaging, shipping, payment processing and sales commissions. Use the same period for fixed costs and the sales you compare them with, such as a month.
The contribution margin ratio, 40% in the example, tells you how much of each sales dollar is left to cover fixed costs and then profit. Raising the price or cutting variable costs lifts it and lowers the break-even point; the margin calculator helps set a price.
Frequently asked questions
What is a break-even point?
The sales level where total revenue equals total costs, so you make neither a profit nor a loss. Every sale after it adds profit equal to the contribution margin.
How do I lower my break-even point?
Cut fixed costs, raise prices or reduce the variable cost of each unit. Each one shrinks the number of sales needed to cover your costs.
What is contribution margin?
The price of a unit minus its variable cost. It's what each sale contributes toward paying fixed costs and then toward profit.
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