How Break-Even Analysis Works
Break-even analysis estimates the sales volume required for revenue to cover fixed and variable costs.
How the math works
Break-even volume is fixed costs divided by the contribution margin per unit (price minus variable cost per unit) — it's the number of units where total revenue exactly equals total costs, with every unit sold beyond that point contributing pure profit.
Worked example
With $18,000 in fixed costs, a $45 price, and $27 variable cost per unit, the contribution margin is $18/unit, so break-even is 1,000 units ($18,000 / $18). Selling 1,200 units generates $3,600 in profit; selling 900 units means an $1,800 loss.
What to watch for
- Raising the price or lowering variable cost per unit both lower the break-even volume, but through very different business changes
- Fixed costs that seem 'fixed' can still step up at certain volume thresholds (e.g., needing a second location) — the formula assumes fixed costs stay constant
- Break-even tells you the volume needed to avoid a loss, not the volume needed to hit a specific profit target
Practical takeaway
Once you know your break-even volume, compare it honestly against realistic sales expectations — a break-even point above what you can plausibly sell signals a pricing or cost problem before you launch, not after.