Break-even is the point where total revenue equals total cost. It does not mean the business has generated a target profit; it means the modeled period has reached zero operating profit.
Separate fixed and variable costs
Fixed costs do not change directly with each additional unit during the modeled period. Examples may include rent, salaried administration, insurance, and software subscriptions.
Variable costs rise with each unit or sale. Examples may include materials, packaging, transaction fees, shipping paid by the seller, and direct piece-rate labor. Mixed costs should be separated when practical.
Calculate contribution per unit
Subtract variable cost per unit from selling price. The remainder is the contribution available to cover fixed costs and then profit.
If price is $80 and variable cost is $35, each sale contributes $45. Discounts, refunds, and channel fees may reduce the effective selling price.
Divide fixed costs by contribution
The SBA gives the unit formula as fixed costs divided by price minus variable costs. Round up because a fraction of a sale normally cannot cover the remaining cost.
Multiply the rounded units by price to estimate break-even revenue. Keep all inputs in the same period, such as monthly fixed costs and monthly unit sales.
- Contribution per unit = price − variable cost
- Break-even units = fixed costs ÷ contribution per unit
- Break-even revenue = break-even units × selling price
Run scenarios instead of trusting one forecast
Test lower price, higher variable cost, and higher fixed cost cases. A result that only works under the optimistic scenario deserves more investigation.
The SBA emphasizes break-even as an estimate for planning rather than a perfectly accurate accounting determination. Actual costs and production become known over time.
Know the model's limits
A single-product model assumes constant price and variable cost. Multiple products require a stable sales mix or separate calculations. Capacity limits and step costs can also change the relationship.
Break-even does not address cash timing, loan principal, taxes, inventory purchases, or the owner's required return unless those items are deliberately modeled.
Use consistent periods, include all meaningful variable costs, and test several scenarios before treating break-even as a sales target.
Frequently asked questions
Does breaking even mean the business is profitable?
Break-even means modeled revenue equals modeled cost, producing zero operating profit. A target profit requires additional contribution beyond the break-even point.
What happens if selling price is below variable cost?
Every additional sale increases the loss, so there is no positive unit break-even point. Price must exceed variable cost before contribution can cover fixed costs.
Sources and further reading
Sources support the methods and practical guidance above. Product specifications and local requirements should take priority for a specific project.
U.S. Small Business Administration: Break-even point Official formula, definitions, benefits, and limitations of break-even analysis. ↗