Profitability
Break-even point
The break-even point is the level of sales at which revenue exactly covers all costs, so the business makes neither a profit nor a loss.
Break-even units = Fixed costs ÷ (Price − Variable cost per unit); Break-even revenue = Fixed costs ÷ Contribution margin ratio
Worked example
| Fixed costs per month | $60,000 |
| Price per unit | $100 |
| Variable cost per unit | $60 |
| Contribution per unit | $40 (40%) |
$60,000 ÷ $40 = 1,500 units, or $60,000 ÷ 40% = $150,000 of revenue a month
Why it matters
Break-even tells you how much you must sell before a month makes money, and how much a new hire, a lease or a price change moves that line.
Common mistakes
Where it misleads
Treating semi-variable costs, such as overtime or delivery, as entirely fixed or entirely variable.
Using gross margin instead of contribution margin, which leaves out fees, commissions and other variable costs.
Calculating it once and forgetting it moves every time prices or fixed costs change.
Related terms
Keep reading
- Contribution marginContribution margin is what each sale leaves over after every cost that rises with that sale, available to cover fixed costs and profit.
- Gross marginGross margin is the share of revenue left after paying the direct costs of delivering what you sold.
- Operating marginOperating margin is the share of revenue left after the cost of goods sold and all operating expenses, before interest and taxes.
Stop calculating it by hand.
Dear CFO keeps your statements, forecasts and metrics current from the systems you already run.