When to use the break-even calculator
Break-even analysis answers a planning question: how much do you need to sell before you stop losing money? Use it when you plan a new product or business, change a price, take on a new fixed cost such as larger premises, or set a sales target.
Fixed costs, variable costs and contribution margin
The calculator splits your costs into two kinds. Fixed costs stay the same whatever you sell in the period, at least within your normal range of activity. Variable costs rise with every unit you sell. Some costs are mixed, such as an energy bill with a fixed monthly charge plus a charge for usage, so split them as well as you can.
The contribution margin is what each unit sold contributes, first toward fixed costs and then, once they are covered, toward profit. The calculator shows it as an amount per unit and as a share of the selling price, the contribution margin ratio.
Reading the results
The main result is the number of units at which total contribution margin equals fixed costs, so profit is zero. A break-even point of 2,000 units means the contribution from the first 2,000 units only covers fixed costs. Each unit sold beyond that adds its contribution margin to profit, and each unit short of it leaves a loss. If the result is not a whole number, the calculator also gives the next whole number of units, because you cannot sell part of one.
Break-even revenue is the same point expressed as sales: the revenue at which fixed costs are covered. It is useful if you track sales in money rather than in units.
When there is no break-even point
If the selling price equals the variable cost per unit, each sale contributes nothing, so no sales volume covers fixed costs. If the price is below the variable cost, each extra unit adds to the loss. In both cases the calculator says there is no break-even point instead of showing a number. Selling more will not help: the price or the variable cost has to change first.
What the calculation assumes
- The price and the variable cost per unit stay the same at every volume. In practice, volume discounts to customers and bulk-buying savings from suppliers can change both.
- Fixed costs stay fixed. They often step up as a business grows, for example when it needs another employee or more space.
- You sell one product, or a mix of products that stays the same.
Common planning mistakes
- Mixing periods, such as monthly fixed costs with an annual sales target.
- Spreading a fixed cost into the variable cost per unit, for example by dividing rent by expected sales. That counts the rent twice and overstates the break-even point.
- Leaving out variable costs that come with each sale, such as card payment fees or delivery.
- Treating break-even as the goal. It is the point of zero profit. To find the volume for a profit target, add the target profit before tax to your fixed costs before you enter them.
Related tools
The margin calculator and the markup calculator help you set the selling price that goes into a break-even calculation. Gross profit margin is not the same as the contribution margin ratio: it subtracts the cost of goods sold, which can include some fixed production costs and leaves out variable selling costs.