The break-even point is where the revenue line crosses the total cost line. Units to the left represent a loss; units to the right represent profit.
How does your break-even point change at different selling prices?
| Selling price | Contribution/unit | Break-even units | Break-even revenue |
|---|
Frequently asked questions
Your break-even point is the level of sales at which total revenue equals total costs, meaning you make neither a profit nor a loss. Below this point you are making a loss; above it you are making a profit. Knowing your break-even point helps you set realistic sales targets and price products or services correctly.
Fixed costs stay the same regardless of how much you sell, such as rent, insurance, and salaries. Variable costs change in proportion to output, such as materials, packaging, and commission. Getting this split right is essential for an accurate break-even calculation.
Contribution margin is selling price minus variable cost per unit. The higher your contribution margin, the fewer units you need to sell to cover your fixed costs. Increasing your price or reducing variable costs will lower your break-even point.
Yes. For a service business, define your unit as one hour of service, one project, or one client engagement. Your variable cost per unit might include subcontractor fees or direct materials, while fixed costs include your office, software subscriptions, and any salaried staff.
Margin of safety is the difference between your current or projected sales and your break-even sales level. It shows how much sales can fall before you start making a loss. A higher margin of safety means your business is more resilient to a downturn.