Finding your break-even point
The break-even point is where total revenue exactly equals total cost, so you make neither a profit nor a loss. Every unit you sell contributes its price minus its variable cost toward covering your fixed costs. Divide the fixed costs by that contribution per unit and you have the number of units you need to sell before you start earning.
Two examples
With 10,000 in fixed costs, a 50 selling price and 30 of variable cost, each unit contributes 20. You break even at 500 units, which is 25,000 in revenue. Sell the 501st unit and you are finally in profit.
Now nudge the price to 60 while keeping costs the same. Each unit now contributes 30, so break-even drops to about 334 units. A 20% price rise cut the sales you need by a third, which shows how powerful pricing is compared with chasing volume.
Using it
Break-even analysis helps you set prices, judge sales targets and sanity-check whether a venture is viable before you commit. The two fastest levers are raising the price and cutting the variable cost per unit, both of which lower the number of sales you need. One caveat: this is a pre-tax operating figure, so account for tax separately.
Frequently asked questions
Does it tell me my profit?
Not directly. It shows the sales needed to cover costs. Anything above break-even, times the contribution margin, is your profit.
What is contribution margin?
The selling price minus the variable cost per unit, the amount each sale contributes toward fixed costs and profit.
What if price is below variable cost?
Then you lose money on every unit and can never break even. The price must exceed the variable cost.
Are taxes included?
No. This is a pre-tax operating break-even. Include tax separately for a full picture.