Part of our complete guide to small business numbers.
The formula
Break-even point, in units, is calculated as: fixed costs divided by (selling price per unit minus variable cost per unit). The denominator, selling price minus variable cost, is your contribution margin, the amount each sale actually contributes toward covering your fixed costs before you start making profit.
Worked example: Fixed costs of £3,000 a month, a product selling at £25, with £10 of variable cost per unit. Contribution margin is £15 (£25 minus £10). Break-even point is £3,000 ÷ £15 = 200 units a month. Sell fewer than 200 and you're losing money, sell more and every additional unit adds pure profit above the break-even line.
Fixed costs vs variable costs
- Fixed costs don't change with sales volume, rent, salaries, insurance, software subscriptions, you pay them whether you sell one unit or a thousand
- Variable costs move directly with volume, raw materials, packaging, per-unit shipping, payment processing fees, each additional sale brings its own extra cost
Getting this split right matters, a cost misclassified as fixed when it's actually variable will distort your break-even calculation and give you false confidence in your numbers.
Break-even in revenue, not just units
If you sell multiple products at different prices, a single units-based break-even doesn't work cleanly. Instead, calculate your contribution margin ratio (contribution margin divided by selling price, as a percentage), then break-even revenue equals fixed costs divided by that ratio. This gives you a break-even revenue target that works across a mixed product range, rather than needing a separate calculation per product.
Why this exercise is worth doing beyond the number itself
- It forces real clarity on your costs, many small businesses have never cleanly separated fixed from variable costs before doing this exercise
- It reveals your actual margin per sale, which directly informs pricing decisions, if your margin is thinner than you thought, that's worth knowing before you set next year's prices
- It flags when your cost structure has quietly shifted, a rising break-even point over time, even with stable sales, is an early warning sign worth investigating
Want your actual break-even number calculated properly? Try our break-even calculator, or book a free consultation if your cost structure is more complex than a single formula can capture.
Frequently asked questions
What is the break-even point formula?
Break-even point in units equals fixed costs divided by (selling price per unit minus variable cost per unit). The result tells you how many units you need to sell before covering all your costs.
What's the difference between fixed and variable costs?
Fixed costs stay the same regardless of sales volume, such as rent and salaries, while variable costs rise and fall directly with how much you sell, such as materials and per-unit shipping.
Can break-even analysis be done in revenue rather than units?
Yes, break-even revenue equals fixed costs divided by the contribution margin ratio, which is useful for service businesses or businesses selling many different products at different prices.
Why does break-even analysis matter beyond the calculation itself?
It forces you to separate fixed from variable costs and understand your real margin per sale, which is useful for pricing decisions and spotting when a growing business's cost structure is quietly shifting.