Break-Even Analysis: Formula, Example, and Target Profit

Break-even analysis tells you how many units you must sell to cover all your costs — the point where profit is exactly zero. Below it you lose money; above it you profit. It is a cornerstone of pricing, budgeting, and cost-volume-profit (CVP) analysis. This guide covers the formulas and a worked example.

Compute your break-even point instantly with the free Break-Even Analysis Calculator.

The Key Concept: Contribution Margin

Each unit sold contributes something toward covering fixed costs:

📐 Formula

Contribution Margin per unit = Selling Price − Variable Cost per unit

Once contribution has covered all fixed costs, every further unit is pure profit.

The Break-Even Formulas

📐 Formula

Break-even (units) = Fixed Costs / Contribution Margin per unit Break-even (revenue) = Break-even units × Selling Price Contribution Margin Ratio = Contribution Margin / Selling Price

Worked Example

A company has fixed costs of $1,000 per month. Each unit sells for $10 and costs $6 in variable costs.

Step 1: Contribution margin

📐 Formula

Contribution Margin = 10 − 6 = $4 per unit Contribution Margin Ratio = 4 / 10 = 40%

Step 2: Break-even point

📐 Formula

Break-even units = 1000 / 4 = 250 units Break-even revenue = 250 × 10 = $2,500

So the company must sell 250 units (or $2,500 in revenue) each month just to break even.

Selling for a Target Profit

To find the volume needed to earn a specific profit, add the target profit to fixed costs:

📐 Formula

Target units = (Fixed Costs + Target Profit) / Contribution Margin

To earn $600 profit: (1000 + 600) / 4 = 400 units.

Margin of Safety

The margin of safety shows how far sales can fall before you hit break-even:

📐 Formula

Margin of Safety = Actual Sales − Break-even Sales

A larger margin of safety means lower risk.

Assumptions and Limits

Break-even analysis assumes selling price and variable cost per unit are constant and that fixed costs stay fixed over the relevant range. In reality, volume discounts, price changes, and stepped fixed costs can shift the break-even point.

Common Mistakes

Mixing fixed and variable costs — classify each cost correctly first.
Ignoring the contribution margin — you cannot break even if price ≤ variable cost.
Forgetting the time period — fixed costs and the result must use the same period.

Try It Yourself

Enter your fixed costs, selling price, and variable cost into the Break-Even Analysis Calculator to get the break-even point in units and revenue, the contribution margin, and the volume needed for any target profit. For pricing decisions, pair it with the Profit Margin / Mark-Up Calculator.

Key Takeaways

Break-even units = Fixed Costs ÷ Contribution Margin per unit.
For FC = $1,000, price = $10, variable cost = $6: break-even is 250 units ($2,500).
Add target profit to fixed costs to find the sales needed to hit a profit goal.
The margin of safety measures how much sales can drop before a loss.