The break-even point is the sales level at which total revenue equals
total cost, so operating profit is zero. In units, divide fixed costs by
contribution margin per unit. In sales revenue, divide fixed costs by
the contribution-margin ratio.
Break-even formula in units
Break-even units = fixed costs ÷ (selling price per unit −
variable cost per unit)
The amount in parentheses is contribution margin per unit. If a
product sells for $80, its variable cost is $50 and monthly fixed costs
are $24,000, contribution margin is $30. Break-even volume is 800
units:
$24,000 ÷ $30 = 800 units
At 800 units, revenue is $64,000 and variable costs are $40,000. The
remaining $24,000 contribution covers fixed costs, leaving zero
operating profit.
Round a fractional unit up when only whole units can be sold. A
calculated result of 800.1 means at least 801 units are needed under the
assumptions.
Break-even formula in sales
revenue
When products have different prices or revenue is the better planning
measure, use the contribution-margin ratio:
Contribution-margin ratio = (sales − variable costs) ÷
sales
Break-even sales revenue = fixed costs ÷ contribution-margin
ratio
In the example, the ratio is $30 ÷ $80, or 37.5%. Break-even revenue
is $24,000 ÷ 0.375 = $64,000.
For a multi-product business, this result assumes a stable sales mix.
If customers shift toward lower-margin products, the actual break-even
revenue rises.
Which costs are fixed and
variable?
Fixed costs do not change directly with short-term sales volume
within the relevant range. Examples may include base rent, salaried
administration, software subscriptions and insurance. Variable costs
move with units or revenue, such as product materials, transaction fees,
commissions and per-unit shipping.
Some costs are mixed or step-fixed. A utility bill can have a base
charge and usage component. An additional supervisor may be needed after
production crosses a threshold. Split mixed costs when possible and
recalculate when capacity changes.
How do you calculate a
target profit?
Add the desired operating profit to fixed costs before dividing:
Required units = (fixed costs + target profit) ÷ contribution
margin per unit
For the same product, a $12,000 target profit requires ($24,000 + $12,000) ÷ $30 = 1,200 units. This is a target-profit calculation, not the break-even point.
Is 100% ROI the same as
break-even?
No. Break-even means revenue has covered the costs included in the
analysis and operating profit is zero. A 100% return on investment
usually means the gain equals the invested amount, but the exact ROI
definition must specify the numerator, investment base and time
period.
A business can pass operating break-even without recovering all
initial investment. Include startup investment, financing and taxes
separately when the decision requires them.
Break-even analysis in Excel
Create input cells for fixed costs, selling price and variable cost.
Calculate contribution margin as price minus variable cost, then fixed
costs divided by contribution margin. Add an error check: if price is
equal to or below variable cost, the normal break-even unit result does
not exist because every additional unit contributes nothing or loses
money.
Use a separate input for expected sales and calculate expected
operating profit as:
Expected units × contribution margin per unit − fixed
costs
Common mistakes
Do not classify all payroll or all shipping the same way without
examining how each cost behaves. Use matching time periods: monthly
fixed costs require monthly volume. Exclude sales tax collected for an
authority from selling price and revenue.
The formula is a model, not a forecast. Test changes in price,
volume, sales mix, capacity and input cost. A practical decision uses a
margin of safety: expected sales minus break-even sales, expressed in
units, revenue or a percentage of expected sales.
