Finance⏱ 5 min read
How to Calculate the Break-Even Point for a Business
The break-even point is the minimum sales you need to cover all costs. Here's how to calculate it precisely — with fixed costs, variable costs, contribution margin, and worked examples for any business.
Every business has a number: the sales volume or revenue at which it stops losing money and starts making it. That number is the break-even point, and not knowing it is one of the leading causes of small business failure.
Key Concepts First
Fixed costs: Costs that don't change with sales volume — rent, insurance, salaries, software subscriptions. You pay these whether you sell one unit or a thousand.
Variable costs: Costs that change directly with output — raw materials, packaging, delivery, sales commission. Zero sales = zero variable costs.
Contribution margin: The amount each unit sold contributes toward covering fixed costs, after variable costs are deducted.
Contribution Margin per Unit = Selling Price − Variable Cost per Unit
Contribution Margin Ratio = Contribution Margin ÷ Selling Price
The Break-Even Formula
Break-Even Point (units) = Fixed Costs ÷ Contribution Margin per Unit
Break-Even Point (revenue) = Fixed Costs ÷ Contribution Margin Ratio
Worked Example: Candle Business
ItemAmount
Selling price per candle£18
Variable cost per candle (wax, wick, jar, label)£7
Contribution margin per unit£11
Monthly fixed costs (website, market stall fees, packaging)£550
Break-even units = £550 ÷ £11 = 50 candles per month
Break-even revenue = 50 × £18 = £900 per month
This business needs to sell at least 50 candles every month before it makes any profit. The 51st candle sold earns £11 of pure profit.
Break-Even With Multiple Products
When you sell multiple products with different margins, use a weighted average contribution margin:
Weighted CM = Sum of (CM × sales mix %) for each product
Example: Product A (CM £10, 60% of sales), Product B (CM £20, 40%)
Weighted CM = (10 × 0.60) + (20 × 0.40) = 6 + 8 = £14
Break-even = Fixed costs ÷ £14
Break-Even for Pricing Decisions
Break-even analysis works in reverse too. If you know your fixed costs and expected sales volume, you can calculate the minimum viable price:
Minimum price = Variable cost + (Fixed costs ÷ Expected units sold)
Example: £550 fixed costs, 80 units sold, £7 variable cost
Min price = £7 + (£550 ÷ 80) = £7 + £6.88 = £13.88
Any price above £13.88 generates profit at 80 units.
Margin of Safety
The margin of safety tells you how much sales can fall before you hit your break-even point — a measure of your business's resilience.
Margin of Safety = Actual Sales − Break-Even Sales
Margin of Safety % = (Margin of Safety ÷ Actual Sales) × 100
Example: Actual sales 80 units, break-even 50 units
Margin of Safety = 30 units = 37.5%
Sales can fall 37.5% before the business loses money.