Corporate finance
What is the break-even point?
Break-even analysis divides fixed costs by the amount each unit contributes after variable costs to find where revenue equals total cost.
Definition
Break-even analysis divides fixed costs by the amount each unit contributes after variable costs to find where revenue equals total cost.
Intuition
Each unit first covers its own variable cost; the remainder then pays down fixed costs.
Formula
Unit contribution margin is price minus variable cost; fixed costs divided by this margin give break-even units.
Formula variables
Fixed costs do not vary with volume in this model. Price and variable cost are per unit. Contribution margin ratio is unit margin divided by price; break-even sales equal break-even units times price.
When to use it and limits
Use it for an initial single-product pricing or volume threshold. It assumes constant price, unit variable cost, and fixed costs within the relevant range; it does not forecast demand, tax, or capacity.
Example
- Enter fixed costs 10,000, selling price 50, and variable cost 30 per unit.
- Contribution margin is 50 − 30 = 20 per unit, or 40% of selling price.
- Break-even volume is 10,000 ÷ 20 = 500 units, corresponding to 25,000 in sales.
Common mistakes
Do not treat break-even volume as a sales forecast or classify every cost as fixed.
Frequently asked questions
What if price is at or below variable cost?
Each extra sale contributes nothing toward fixed costs, so this model cannot produce a meaningful break-even volume.
What if break-even units are fractional?
The formula gives a continuous quantity. For indivisible products, round up to the next whole unit to meet or exceed break-even.
Does this work for multiple products?
This page assumes one product with constant price and unit cost. A product mix requires an assumed sales mix and weighted contribution margin.