Reviewed November 2026. Formulas are shown above the guide. Report an error or request a calculator.
The break-even point
Every unit you sell earns its contribution: the selling price minus the costs that rise with each unit. Contribution first pays the fixed costs that you carry whatever happens, such as rent, salaried staff and equipment leases. The break-even point is the volume where total contribution exactly covers those fixed costs. Below it you lose money; above it each extra unit adds its full contribution to profit.
Worked example
With fixed costs of $28,000 a month, a price of $24 and a variable cost of $13.50, each unit contributes $10.50.
| Item | Value |
|---|---|
| Break-even (28,000 ÷ 10.50) | 2,667 units |
| Units for $8,000 profit | 3,429 units |
| Profit at 3,500 expected sales | $8,750 |
| Margin of safety | 23.8% |
Sales could fall by almost a quarter before the product stops paying for itself.
Fixed or variable?
Variable costs change with each unit: material, purchased parts, packaging, piece-rate labor, sales commission and outbound shipping. Fixed costs stay flat within a normal range of output: rent, salaried staff, insurance, leases and depreciation. Some costs are mixed. Electricity has a fixed base charge and a variable part, and overtime turns fixed labor into variable labor at high volume. Split mixed costs as well as you can; the result is only as good as that split.
Using the result
- Pricing: raising the price by $1 here lifts contribution by almost 10% and cuts break-even by about 230 units.
- Make or buy: buying a part instead of making it often turns fixed costs into variable ones, which lowers break-even but also lowers profit at high volume.
- Forecast risk: a margin of safety under 20% means a normal bad month can push the product into a loss.
Frequently asked questions
What is contribution margin?
Selling price minus variable cost per unit. As a percentage of price it is the contribution margin ratio.
What is a good margin of safety?
Above 20% is comfortable for most products. Below 10% means small forecast errors turn profit into loss.
Does break-even include depreciation?
Yes, depreciation of equipment used for the product is a fixed cost. For a cash break-even, leave it out.
Can I use this for a whole factory?
Yes, if you use average price and average variable cost for the product mix. Results become less reliable when the mix changes a lot.