Break-even Analysis Explained

Break-even analysis estimates how many units must be sold before revenue covers costs. It is useful for pricing, product planning and small business scenarios, but it depends heavily on the assumptions you enter.

Formula

Break-even units = fixed costs / (price per unit - variable cost per unit). The denominator is called contribution margin per unit.

Worked Example

If fixed costs are $2,000, price is $50 and variable cost is $30, the contribution margin is $20. Break-even units = 2,000 / 20 = 100 units.

Assumptions and Limits

The formula assumes one product, constant price, constant variable cost and fixed costs that do not change across the volume range. Real businesses may have taxes, refunds, payment fees, shipping, spoilage and mixed product margins.

Common Mistakes

Do not use revenue as profit. Do not ignore variable costs. Do not assume selling one more unit is always possible at the same price.