What Is the Break-Even Point?
The break-even point is the level of sales at which total revenue equals total costs — the point of zero profit or loss. Every unit sold above break-even generates profit; every unit below generates a loss. Understanding your break-even is essential for pricing decisions, launch planning, and assessing business viability.
Break-Even Formulas
Contribution Margin = Selling Price − Variable Cost per Unit
Break-Even (units) = Fixed Costs / Contribution Margin
Break-Even (revenue) = Fixed Costs / Contribution Margin Ratio
Units for Profit Target = (Fixed Costs + Target Profit) / CM
Break-Even by Business Type
| Business | Fixed Costs | CM per Unit | Break-Even |
|---|---|---|---|
| Restaurant (monthly) | $25,000 | $12/cover | 2,083 covers |
| SaaS product | $15,000 | $45/subscription | 334 subscribers |
| Physical product | $10,000 | $40/unit | 250 units |
| Consulting firm | $20,000 | $150/hour | 133 billable hours |
Frequently Asked Questions
Contribution margin (CM) is the selling price minus variable costs per unit. It represents the amount each unit 'contributes' to covering fixed costs and generating profit. A $75 product with $35 variable cost has a $40 CM — meaning each sale contributes $40 toward the $10,000 fixed cost before profit begins.
Fixed costs don't change with production volume: rent, salaries, software subscriptions, insurance. Variable costs scale directly with units sold: raw materials, packaging, shipping, sales commissions, payment processing fees. Some costs are semi-variable (e.g., utilities, part-time labor) — assign them carefully.
Three levers: increase selling price (most impactful, directly raises CM), reduce variable costs (improve supplier terms, reduce waste, improve efficiency), or reduce fixed costs (renegotiate rent, cut non-essential overhead). Increasing price by 10% on a 40% margin product improves profitability by 25%.
The CM ratio (or contribution margin percentage) is CM divided by selling price. A CM ratio of 53% means 53 cents of every dollar of revenue covers fixed costs and profit. It equals your gross margin percentage when applied to service or software businesses with minimal variable costs.