The break-even formula
Break-even units = Fixed costs ÷ (Price per unit − Variable cost per unit)
The bottom part, price minus variable cost, is the contribution margin: what each sale contributes towards paying your fixed costs. Once enough sales have covered the fixed costs, every further sale's contribution is profit.
Break-even revenue = Fixed costs ÷ Contribution margin ratio, where the ratio is contribution margin ÷ price.
Worked example
A small print shop has $5,000 of fixed costs a month. It sells custom T-shirts for $50 each, and each shirt costs $20 in blanks, ink and card fees.
- Contribution margin: $50 − $20 = $30 per shirt (a 60% ratio)
- Break-even: $5,000 ÷ $30 = 166.7, so 167 shirts a month
- Break-even revenue: $5,000 ÷ 0.60 = $8,333
- To earn $3,000 profit: ($5,000 + $3,000) ÷ $30 = 267 shirts
Break-even for service businesses and freelancers
If you sell time, treat one billable hour (or one project) as the "unit". Your price is your hourly rate, and the variable cost is whatever each hour directly costs you – subcontractor fees, payment processing, materials. Fixed costs are your monthly overheads. The result is the number of billable hours you need each month just to cover costs. Compare it with the hours you can realistically bill using the hourly rate calculator.
How to lower your break-even point
- Raise prices – the most powerful lever, because the whole increase goes to contribution margin. Check the effect on margin with the profit margin calculator.
- Cut variable costs – cheaper suppliers, lower payment fees, less waste.
- Cut fixed costs – renegotiate rent, drop unused software subscriptions.
- Sell a better mix – push the products with the highest contribution margin.
The margin of safety tells you how far sales can fall before you stop making money; below about 10–20% there is little room for a slow month.
Frequently asked questions
What counts as a fixed cost?
Costs that stay the same regardless of how much you sell in the period: rent, salaries, insurance, software subscriptions, loan repayments and similar overheads.
What if I sell several products at different prices?
Use a weighted average price and variable cost based on your typical sales mix, or calculate break-even for each product line using its share of fixed costs.
Why is the break-even units figure rounded up?
You can't sell part of a unit, and selling one fewer would leave you short of covering fixed costs, so the calculator rounds up to the next whole unit. The exact figure is shown too.
What is the margin of safety?
The percentage by which expected sales exceed break-even sales. A 25% margin of safety means sales could fall by a quarter before you start making a loss.
