What is the Break-Even Point?
The break-even point is the sales level — in units or dollars — where total revenue exactly equals total costs, so profit is zero. It's a foundational tool for pricing, cost control, and planning how many units must be sold to start making money.
Break-even point in units equals fixed costs divided by the contribution margin per unit (selling price minus variable cost per unit); every unit sold beyond that point adds its contribution margin directly to profit.
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Step-by-step worked examples
Fixed costs are $60,000, price is $40 per unit, and variable cost is $25 per unit. Find the break-even point in units.
CM per unit = 40 − 25 = $15 BEP = Fixed Costs / CM per unit = 60,000 / 15 = 4,000 units
Using the same numbers, find the break-even point in sales dollars.
BEP ($) = BEP units × Price per unit BEP ($) = 4,000 × 40 = $160,000
If fixed costs rise to $75,000 while price and variable cost stay the same, find the new break-even point.
CM per unit = 40 − 25 = $15 (unchanged) BEP = 75,000 / 15 = 5,000 units
Flashcards
Quick quiz
Q1.The break-even point in units formula is:
Q2.Fixed costs are $40,000, price is $20, and variable cost is $12 per unit. Break-even units are:
Q3.At the break-even point, profit is:
Q4.If variable cost per unit increases while price and fixed costs stay the same, the break-even point:
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Common mistakes
Forgetting to subtract variable cost before dividing fixed costs. — Correct: Always compute contribution margin per unit (Price − Variable Cost) first, then divide fixed costs by it.
Assuming break-even is a profit target. — Correct: Break-even is zero profit — a floor to cover, not a business goal.
Using total sales revenue instead of price per unit in the units formula. — Correct: The break-even units formula needs price per unit, not total sales revenue.
Ignoring that break-even shifts whenever costs or price change. — Correct: Any change in fixed costs, selling price, or variable cost changes the break-even point.
FAQ
What is the break-even point?
The break-even point is the sales level, in units or dollars, where total revenue exactly equals total costs, resulting in zero profit.
What is the break-even point formula?
BEP (units) = Fixed Costs / (Price − Variable Cost per unit). BEP ($) = BEP units × Price per unit.
What are examples of break-even analysis?
With $60,000 fixed costs, a $40 price, and $25 variable cost, break-even is 4,000 units ($160,000 in sales).
How do you calculate break-even point in sales dollars?
Multiply the break-even point in units by the selling price per unit, or divide fixed costs by the contribution margin ratio.