What Is the Break-Even Point?
The break-even point is where revenue equals total costs. Every unit sold beyond it is profit.
Key Takeaways
- Break-even = Fixed Costs ÷ Contribution Margin per Unit.
- Below break-even, every sale adds to a loss. Above it, every sale adds to profit.
- Knowing your break-even point is essential for pricing and capacity planning.
The formula
Break-even point in units = Fixed Costs divided by Contribution Margin per Unit. If your fixed costs are £20,000 per month and each unit you sell contributes £10 after variable costs, you need to sell 2,000 units per month to break even. The 2,001st unit is profit.
Break-even in revenue terms
You can also express break-even as a revenue figure: Fixed Costs divided by Contribution Margin Ratio (contribution margin as a percentage of selling price). If fixed costs are £20,000 and your contribution margin ratio is 40%, break-even revenue is £50,000.
Using it for decisions
Break-even analysis answers practical questions. Can we afford to drop our price by 10%? How many units do we need to sell to cover a new hire? If we take on a larger premises, what revenue do we need to justify the rent increase? It turns abstract financial planning into concrete targets.
Limitations
Break-even analysis assumes costs and selling prices are constant — they rarely are. It does not account for cash flow timing. And it can give false comfort: being above break-even in units doesn't mean you are profitable if you've miscalculated your fixed or variable costs. Use it as a planning tool, not an absolute answer.