What is Break-Even Analysis?
Break-even analysis tells a business exactly how many units it must sell — or how much revenue it must earn — before it starts making a profit. It's one of the first calculations any founder or finance student learns, because it turns fixed costs, variable costs and price into a single, clear number.
The break-even point is the sales volume at which total revenue equals total costs — zero profit, zero loss. In units: BEP = Fixed Costs ÷ (Price per unit − Variable cost per unit).
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Step-by-step worked examples
A bakery has $1,000 in fixed costs, sells cupcakes at $20, and each costs $10 to make. Find the break-even point.
BEP = FC / (P − VC) BEP = 1000 / (20 − 10) = 1000 / 10 BEP = 100 units
A software tool has $6,000/month fixed costs, sells at $50/month, and variable cost (support/hosting) is $10/user. Find the break-even number of subscribers.
BEP = FC / (P − VC) BEP = 6000 / (50 − 10) = 6000 / 40 BEP = 150 subscribers
A t-shirt printer has $2,400 fixed costs, sells shirts for $18, and each costs $6 in materials/labor. How many shirts to break even, and what's the break-even revenue?
BEP = FC / (P − VC) BEP = 2400 / (18 − 6) = 2400 / 12 BEP = 200 shirts Break-even revenue = 200 × $18 = $3,600
Flashcards
Quick quiz
Q1.Fixed costs are $2,000, price is $25/unit, variable cost is $15/unit. Break-even point?
Q2.What does the break-even point represent?
Q3.If a company lowers its variable cost per unit (price and fixed costs unchanged), the break-even point will:
Q4.Contribution margin is calculated as:
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Common mistakes
Forgetting to subtract variable cost before dividing by fixed costs. — Correct: The denominator is (Price − Variable cost), the contribution margin — not price alone.
Treating rent, salaries and marketing spend as variable costs. — Correct: Fixed costs stay constant regardless of sales volume; variable costs scale with each unit sold.
Assuming break-even point means the business is profitable. — Correct: At break-even, profit is exactly zero — profit only starts above that volume.
Using a break-even formula with mismatched units (e.g., yearly fixed costs with monthly price). — Correct: Make sure fixed costs, price and variable cost are all measured over the same time period.
FAQ
What is break-even analysis?
Break-even analysis calculates the sales volume at which total revenue equals total costs, so profit is zero.
What is the break-even point formula?
BEP (in units) = Fixed Costs ÷ (Price per unit − Variable cost per unit).
What are examples of break-even analysis?
A bakery calculating how many cupcakes it must sell to cover rent, or a SaaS company finding how many subscribers cover its server costs, are both break-even examples.
How do you calculate the break-even point?
Divide total fixed costs by the contribution margin (price per unit minus variable cost per unit) to get the number of units you must sell.