Why use this calculator
Break-even is the first number a lender, a landlord or a business partner asks for, because it converts a pile of separate costs into one target that everyone in the business can understand. It is also the calculation most often done wrong, because people divide fixed costs by the selling price or by the gross margin percentage instead of by contribution margin per unit.
Only contribution, which is the price less the costs that exist because the unit sold, tells you what each sale actually puts towards the rent. This calculator uses contribution properly, refuses to invent a break-even point when the price does not cover the variable cost, and shows the volume required for a target profit as well as for zero, which is the version that actually drives a budget.
How to use it
- Enter your fixed costs for one period, adding up everything that will be charged whether you sell nothing or sell out: rent, permanent salaries and superannuation, insurance, software subscriptions, accounting fees, loan interest and depreciation, all taken from the expense section of your profit and loss for the same month or year.
- Enter the selling price per unit as the average you actually receive after discounts and rebates rather than the list price, which you can check against a recent batch of invoices.
- Enter the variable cost per unit as everything that only happens when a unit sells: materials, packaging, outbound freight, sales commission and card or marketplace fees.
- Enter a target profit if you are budgeting rather than testing viability, and leave it at zero for a pure break-even answer.
What each result means
- Break-even units
- The number of sales at which total contribution exactly equals fixed costs. One more sale after this point is pure profit at the contribution rate.
- Break-even revenue
- The sales dollars those units represent. Useful when your business tracks turnover targets rather than unit counts.
- Contribution margin per unit
- Price less variable cost, being the amount each sale contributes towards fixed costs. This is the engine of the whole calculation.
- Contribution margin ratio
- Contribution as a percentage of price. A low ratio means break-even moves sharply whenever price or input costs change.
- Units for target profit
- Volume needed to cover fixed costs and deliver the profit you entered. This is the number a sales budget should actually be built on.
- What to change
- Shown when the price is below the variable cost. It names the price floor and cost ceiling that would make a break-even point exist.
The formula
Contribution margin per unit = Selling price − Variable cost per unit
Break-even units = Fixed costs ÷ Contribution margin per unit, rounded up because part units cannot be sold
Break-even revenue = Break-even units × Selling price
Contribution margin ratio
% = (Contribution ÷ Selling price) × 100
For a profit target, Units required = (Fixed costs + Target profit) ÷ Contribution margin per unit
Fixed costs are the period costs that do not move with volume, variable costs are those incurred only when a unit sells, and contribution is what each sale puts towards fixed costs before any profit exists.
How this number is used in practice
The shape of a cost base decides how a business behaves under pressure. A cafe with high fixed costs in rent and rostered staff but a 65% to 70% contribution ratio on food reaches break-even late in the month and then makes money quickly, which is why the last hour of trade matters so much.
A wholesaler with low fixed costs and a 15% to 25% contribution ratio breaks even early but gains little from each extra sale, so growth has to come from volume rather than from squeezing the margin. Software and subscription businesses sit at the extreme, often above 80% contribution, with almost all cost fixed: they lose money for a long time and then become very profitable once the fixed base is covered. Knowing which pattern you are in tells you whether to chase volume or protect price.
Owners use the number in three ways. As a daily target, dividing monthly break-even units by trading days gives a figure staff can actually see: a restaurant needing 34 covers a day to pay the rent is a more useful instruction than a $47,000 monthly cost base.
As a discount guardrail, since cutting price cuts contribution far faster than it cuts revenue, a 10% discount on a 30% contribution ratio raises the break-even volume by 50%. And as a decision rule for fixed cost commitments: signing a lease or hiring a salaried role raises fixed costs immediately, and break-even analysis puts a specific unit number on how much extra trade that decision requires before it pays for itself.
Worked examples
$10,000 of monthly fixed costs, $50 price, $20 variable cost
Contribution $30.00 a unit, break-even 334 units and $16,700 of revenue, a 60.00% contribution ratio.
Cafe with $45,000 of monthly fixed costs, $12 average spend, $4.50 of food cost
Contribution $7.50 a sale, so 6,000 sales and $72,000 of revenue each month just to break even.
$30,000 of fixed costs, $200 price, $140 variable cost, and a $24,000 profit target
Break-even is 500 units, but 900 units are needed to also deliver the $24,000 of profit.
When people use it
- Testing whether a new product or location can realistically cover its costs
- Turning a monthly cost base into a daily sales target staff can act on
- Setting the floor price below which a discount or tender is not worth winning
- Deciding whether the business can afford a new salaried role or a bigger lease
- Preparing the viability section of a business plan or loan application
- Checking how far sales can fall before the business starts losing money
Tips
- Divide by contribution per unit, never by price and never by the gross margin percentage. Dividing by price ignores variable costs entirely and understates break-even badly.
- Classify by behaviour, not by name. A delivery driver paid per job is a variable cost even though wages usually sit in fixed costs.
- Include the owner's wage in fixed costs. A break-even that only works because nobody is paying you is not a break-even.
- Recalculate whenever price or input costs move more than a few per cent. Break-even is far more sensitive to price than to volume.
- Convert the answer to a daily or weekly target. Monthly unit counts are too abstract for anyone on the floor to use.
- For a business with many products, run the calculation on an average order value and average variable cost, then check it against the mix you actually sell.
- Loan principal repayments are not an expense but they still have to be funded, so add them to fixed costs when you are testing cash viability rather than accounting profit.
What it assumes, and where it stops being accurate
- Price and variable cost per unit are constant at every volume. In reality bulk discounts, freight breaks and overtime all change the numbers as volume rises.
- Fixed costs stay flat across the whole range. Most are only fixed within a band, and stepping up to a second shift or a bigger site moves the line sharply.
- A single product or a stable sales mix. With several products at different margins, the answer changes whenever the mix changes.
- Everything produced is sold in the same period, so inventory build-up and write-offs are ignored.
- It is an accounting break-even, not a cash break-even. Loan principal, tax instalments and stock purchases affect cash but do not appear here unless you add them to fixed costs.
- Tax is excluded, so a target profit entered here is a pre-tax figure.
Terms used on this page
- Contribution margin
- Selling price less variable cost per unit, being what each sale puts towards fixed costs.
- Fixed cost
- A cost that does not change with sales volume within the normal trading range.
- Variable cost
- A cost incurred only when a unit is produced or sold, so it rises and falls with volume.
- Break-even point
- The sales volume at which total contribution exactly equals fixed costs and profit is zero.
- Margin of safety
- How far current sales sit above break-even, usually expressed as a percentage of sales.
Questions people ask
- What is the difference between fixed and variable costs?
- Fixed costs are charged whether you sell anything or not, such as rent, insurance, permanent salaries and software subscriptions. Variable costs only exist because a unit sold, such as materials, packaging, outbound freight and sales commission. The test is simple: if you sold nothing this month, would the cost still arrive? If yes, it is fixed.
- Why divide by contribution margin instead of by the selling price?
- Because only part of each sale is available to pay fixed costs. If a $50 item costs $20 to supply, the sale contributes $30, not $50. Dividing fixed costs by the price would say 200 units where the true answer is 334, which is a serious underestimate of the trading you need.
- What if my price is below my variable cost?
- Then there is no break-even point at any volume, and selling more increases the loss. The calculator says so rather than printing a number. The only fixes are raising the price above the variable cost or cutting the variable cost below the price; volume will not help.
- How do I handle a business with many products?
- Use a weighted average. Take your average selling price and average variable cost across the actual sales mix, then read the answer as average orders rather than units of one item. If the mix shifts towards low-margin lines, recalculate, because break-even moves with mix even when total sales do not.
- Should the owner's wage be a fixed cost?
- Yes, if you intend to be paid. Leaving the owner out produces a break-even the business can technically hit while the owner works for nothing, which hides an unsustainable position. Put a realistic market salary for the work you do into fixed costs, and treat any profit above that as a return on the business.
- Does break-even tell me if my business is viable?
- It tells you the volume required, not whether that volume is achievable. The real test is comparing break-even units against the market you can reach: 6,000 cafe sales a month is 200 a day, which is realistic for a busy site and impossible for a quiet one. Always sanity-check the answer against capacity and demand.
Use this with
Break-Even Calculator answers one part of the question. These pick up where it stops: Profit Margin Calculator, Markup Calculator, Pricing Strategy Calculator and Cash Flow Forecast Calculator.
Where these figures come from
This calculation is jurisdiction-neutral arithmetic. No country-specific rules are applied.
- U.S. Small Business Administration. Pricing, break-even and financial planning guidance for US businesses
- business.gov.au: Australian Government business portal. Official guidance on pricing, cash flow and financial management for small business
- Australian Bureau of Statistics. Industry-level business performance and profitability statistics
Break-Even Calculator produces an estimate for general information. It is not financial, tax, medical, legal or engineering advice. read the full disclaimer. Spotted a wrong number? Report it and it gets fixed. The form picks up this calculator and the inputs you used.