Break-even analysis finds the sales level where total revenue equals total costs — the point where a business earns nothing and loses nothing. To get break-even in units, divide fixed costs by the contribution margin per unit, which is price minus variable cost per unit. To get break-even in sales dollars, divide fixed costs by the contribution margin ratio.
You reach for this number whenever a decision changes price, cost, or volume: pricing a new product, deciding whether a rent increase is survivable, or judging how far sales can slip before losses start. Break-even is one output of the broader cost-volume-profit model; this article covers the break-even calculation itself, in both forms, with every step shown.
Break-even point (units) = F ÷ (P − V)
F — Total fixed costs for the period
P — Selling price per unit
V — Variable cost per unit
P − V — Contribution margin per unit
Break-even point (sales dollars) = F ÷ CM ratio
F — Total fixed costs for the period
CM ratio — Contribution margin per unit ÷ selling price per unit — the share of each sales dollar left after variable costs
Costs that stay the same in total no matter how many units you sell: rent, salaries, insurance, software subscriptions, straight-line depreciation. Pull them from the budget or income statement for the same period you want the break-even for — a monthly break-even needs monthly fixed costs, an annual one needs annual figures.
What one unit actually sells for, net of routine discounts. For a single-product business this is the list price. A business selling several products needs a weighted-average figure — see the FAQ below.
Everything that rises with each unit sold: materials, direct labor paid per unit, packaging, shipping, card-processing fees, sales commissions. The test is simple — if the cost would disappear at zero sales, it is variable. If it would still be there, it belongs in fixed costs.
The slice of each sale left after variable costs. It goes first toward covering fixed costs; only after fixed costs are fully covered does it become profit. Per unit, it is price minus variable cost. As a ratio, it is that per-unit amount divided by price. Classifying costs correctly is where most break-even errors start — if you are unsure which costs count as variable, work through contribution margin first, because the break-even answer is only as good as that classification.
Beacon Print Co. sells framed art prints for $32.00 each. Variable cost per print — paper, frame, packaging, and payment processing — is $19.20. Fixed costs run $86,720 a year: studio rent, one part-time salary, software, and insurance.
| Step | Calculation | Result |
|---|---|---|
| Contribution margin per print | $32.00 − $19.20 | $12.80 |
| Break-even in units | $86,720 ÷ $12.80 | 6,775 prints |
| Contribution margin ratio | $12.80 ÷ $32.00 | 0.40 (40%) |
| Break-even in sales dollars | $86,720 ÷ 0.40 | $216,800 |
| Cross-check | 6,775 prints × $32.00 | $216,800 |
Beacon breaks even at 6,775 prints, or $216,800 of revenue. Sell 6,774 and the year ends $12.80 short of covering costs; every print past 6,775 adds $12.80 of profit. The two versions serve different audiences — a revenue target for whoever watches the top line, a unit count for whoever plans production — and they always agree, as the cross-check row shows.
Suppose Beacon's landlord raises rent by $480 a month, which is $5,760 a year. Price and variable cost per print do not move, so the contribution margin stays $12.80 and the ratio stays 40%. Only F changes — and both break-even figures shift with it.
| Step | Calculation | Result |
|---|---|---|
| New fixed costs | $86,720 + $5,760 | $92,480 |
| New break-even in units | $92,480 ÷ $12.80 | 7,225 prints |
| New break-even in dollars | $92,480 ÷ 0.40 | $231,200 |
| Change in break-even | 7,225 − 6,775 | 450 more prints |
Every new dollar of fixed cost must be covered by contribution margin before profit restarts, so the 450-print jump is exactly the rent increase divided by the $12.80 margin. That is the practical use of break-even analysis: before signing the new lease, Beacon knows the rent costs 450 prints of cushion.
The same logic runs a pricing decision in reverse. If Beacon raised its price to $34.00 under the original rent, the contribution margin would climb to $14.80 per print, and dividing $86,720 by that margin gives about 5,859.5 — round up to 5,860 prints, since a partial print cannot be sold. Break-even falls by 915 prints. The real question the analysis frames is whether the higher price would cost Beacon more than 915 prints of demand.
A break-even chart puts units sold on the horizontal axis and dollars on the vertical axis, then draws two lines. The revenue line starts at the origin — zero sales, zero revenue — and rises by the selling price with each unit, so for Beacon it climbs $32.00 per print. The total-cost line starts at the fixed-cost level on the vertical axis, $86,720 for Beacon, because those costs exist even at zero sales; it then rises by the variable cost, $19.20 per print, which makes it flatter than the revenue line.
Because the revenue line starts lower but rises faster, the two lines cross exactly once — at the break-even point. For Beacon they cross at 6,775 prints and $216,800. To the left of the crossing, the cost line sits above the revenue line, and the vertical gap between them is the loss at that volume. To the right, revenue sits on top, and the gap is profit. The wedges also show why the inputs matter: a rent increase lifts the cost line's starting point and slides the crossing to the right, while a price increase steepens the revenue line and slides it to the left.
Gross margin subtracts cost of goods sold, and for a manufacturer COGS includes fixed production overhead. Contribution margin subtracts only variable costs. Plugging a gross margin percentage into the sales-dollars formula double-counts fixed overhead — once inside the margin, once in F — and produces a quietly wrong break-even. Build the margin from a variable-costing view.
Break-even is a snapshot of three inputs, and all three drift: suppliers raise material prices, landlords raise rent, discounting erodes the effective selling price. Beacon's number moved from 6,775 to 7,225 prints on a single lease renewal. Recompute whenever any input changes, not once a year.
A break-even of 6,775 prints is only useful if Beacon can realistically make and sell that many. If the studio's capacity is 5,000 prints a year, the business loses money at every feasible volume and the model is telling you the structure fails, not that you should try harder. Compare break-even with honest capacity and demand estimates before treating it as a goal.
Break-even in units is fixed costs divided by contribution margin per unit; break-even in dollars is fixed costs divided by the contribution margin ratio. Both name the same point — the sales level where contribution margin exactly covers fixed costs — and both move the moment any input moves.
Breaking even means earning exactly zero profit: total revenue covers all fixed and variable costs with nothing left over. One unit below that sales level produces a loss; one unit above it produces profit equal to the contribution margin per unit.
Round up. If the division gives 5,859.5 units, the break-even point is 5,860, because at 5,859 there is still a small loss and a partial unit cannot be sold. Rounding down would report a volume that loses money as if it broke even.
No — break-even is one output of the larger cost-volume-profit model. CVP uses the same fixed-cost and contribution-margin machinery to answer more questions: the volume needed for a target profit, the margin of safety, and how operating leverage magnifies profit swings.
Use the sales-dollars formula with a weighted-average contribution margin ratio, weighting each product's ratio by its share of total sales. The answer is only valid for that sales mix — if the mix shifts toward lower-margin products, the break-even point rises.
At the break-even point, profit is zero, so income tax is zero and taxes do not change the answer. Taxes matter as soon as you set a target profit above zero: the pre-tax profit you must earn is the after-tax target divided by one minus the tax rate.
Contribution margin. Gross margin includes fixed production overhead inside cost of goods sold, so using it both understates the margin and double-counts costs already sitting in the fixed-cost total. Strip the margin down to price minus variable costs before dividing.
By the FinanceBrain Team · Last verified July 11, 2026 · How we produce and verify articles