Break-even point formula
Learn what the break-even point is, both formulas, and how to calculate it with worked examples.
November 2023 | Published by Xero
Published Thursday 23 July 2026
Table of contents
Key takeaways
- The break-even point is the level of sales where your total revenue equals your total costs, so you make neither a profit nor a loss.
- There are two formulas: one gives you the sales revenue you need, the other gives you the number of units or hours you need to sell.
- Contribution margin, the selling price minus the variable cost per unit, sits at the heart of both formulas.
- You can lower your break-even point by reducing fixed costs, raising your selling price, or cutting variable costs per unit.
What is the break-even point?
The break-even point is the level of sales at which your total revenue exactly covers your total costs, leaving you with neither a profit nor a loss. Below that level you're making a loss, and above it you start turning a profit.
It's a key milestone for any business, because it tells you the minimum you need to sell just to keep the lights on. Businesses often use it to set baseline sales targets and check whether a product or price is viable.
Why the break-even point matters
Knowing your break-even point turns a vague sense of "we need more sales" into a concrete number you can plan around. It gives you a clear target and a way to test decisions before you commit to them.
It helps you set realistic sales goals, price your products with confidence, and understand how a change in costs affects your bottom line. If you're trying to increase revenue or increase your profits, the break-even point shows you exactly how far each move gets you.
It's also useful when you're pitching to a lender or investor. A clear break-even figure signals that you understand your numbers and are staying on top of managing cash flow.
The two break-even formulas
There are two ways to calculate your break-even point, and both rely on the same three inputs: fixed costs, variable costs, and selling price. You pick the one that answers the question you're asking.
- The revenue formula gives you a dollar figure: the sales revenue you need to bring in to cover your costs
- The unit formula gives you a volume: the number of units, or hours, you need to sell to cover your costs
The revenue formula suits any business, including those selling a mix of products. The unit formula works best when you sell a single product at one price, or a service at one hourly rate.
Contribution margin explained
Contribution margin is the money left over from each sale after you subtract the variable cost of making it. In other words, it's your selling price minus your variable cost per unit, and it's the amount each sale contributes towards covering your fixed costs.
You can also express it as a ratio. The contribution margin ratio is the contribution margin divided by the selling price, which tells you what proportion of each sale is available to cover fixed costs. Both break-even formulas use this idea: once your total contribution margin equals your fixed costs, you've broken even.
Revenue break-even point formula
The revenue formula tells you the dollar value of sales you need to reach break-even. It uses the contribution margin ratio to work out how much revenue is needed to cover your fixed costs.
Break-even point (revenue) = fixed costs / (1 - (variable costs / selling price))
Where:
- Break-even point (revenue) is the dollar value of sales required to reach profitability
- Fixed costs are expenses that stay the same no matter how much business you're doing, like rent and insurance
- Variable costs are expenses that change with production volume, like raw materials or hourly wages
- Selling price is what you charge for your goods or services
Unit break-even point formula
The unit formula tells you how many sales you need to make to break even, rather than how much revenue. It's the simplest option for a business selling one product at a single price, or a service billed at one hourly rate.
Break-even point (units) = fixed costs / (selling price - variable costs)
The bottom half of this formula (selling price minus variable costs) is your contribution margin per unit. Divide your fixed costs by that figure and you get the number of units, or hours, you need to sell.
Break-even calculation examples
These worked examples show both formulas in action, one for a product-based business and one for a service-based business. Each example works out the revenue and the volume needed to break even.
Break-even example for a product-based business
A kombucha brewery has fixed monthly costs of $6,000 for rent, utilities, insurance and advertising. Their variable costs are $2 per bottle for packaging, ingredients and labour, and they sell each bottle for $7.
Here's the revenue calculation:
- Revenue required = fixed costs / (1 - (variable costs / selling price))
- = $6,000 / (1 - ($2 / $7))
- = $6,000 / (1 - 0.286)
- = $6,000 / 0.714
- = $8,403
To break even, the kombucha brewery must bring in $8,403 monthly.
Here's the volume calculation:
- Volume required = fixed costs / (selling price - variable costs)
- = $6,000 / ($7 - $2)
- = $6,000 / $5
- = 1,200
To break even, the kombucha brewery must sell 1,200 bottles monthly.
Break-even example for a service-based business
A graphic designer has fixed monthly costs of $2,700 for utilities, hardware leases, software subscriptions and advertising. Their variable costs are $35 per hour to hire a contractor, and clients are charged $75 per hour.
Here's the revenue calculation:
- Revenue required = fixed costs / (1 - (variable costs / selling price))
- = $2,700 / (1 - ($35 / $75))
- = $2,700 / (1 - 0.467)
- = $2,700 / 0.533
- = $5,064
To break even, the graphic designer must earn $5,064 monthly.
Here's the volume calculation:
- Volume required = fixed costs / (selling price - variable costs)
- = $2,700 / ($75 - $35)
- = $2,700 / $40
- = 67.5
To break even, the graphic designer must bill 67.5 hours monthly.
How to lower your break-even point
Lowering your break-even point means you reach profitability with fewer sales, which gives you more breathing room. You can pull three practical levers, and each one changes a different input in the formulas.
- Reduce fixed costs by reviewing rent, insurance, subscriptions, and other overheads you pay regardless of sales
- Raise your selling price, which widens your contribution margin on every sale (see our guide to raising your prices)
- Cut variable costs per unit by sourcing cheaper materials or streamlining how you produce each item
Even a small move on any of these can meaningfully improve your profit margin and shorten the time it takes to break even.
Break-even point for multiple products
The unit formula assumes you sell one product at a single price, so it gets tricky when you sell lots of items at different prices. To handle this, you use a weighted-average contribution margin.
You work out the contribution margin for each product, then weight it by the share of total sales each product represents. Dividing your fixed costs by that weighted-average figure gives you the total number of units you need to sell across your whole range to break even.
Track your break-even point with Xero
When your fixed costs, variable costs, and sales sit in one place, working out your break-even point takes minutes instead of a spreadsheet session. Xero brings your finances together so you can see where you stand and make confident decisions about pricing and costs. Try Xero and get one month free.
FAQs on the break-even point
Here are answers to some frequently asked questions about the break-even point.
How do you calculate the break-even point in dollars and units?
For dollars, divide your fixed costs by your contribution margin ratio, which is 1 minus (variable costs divided by selling price). For units, divide your fixed costs by the contribution margin per unit, which is your selling price minus your variable cost per unit.
What is a good break-even point?
A lower break-even point is generally better, because it means you become profitable after fewer sales. What counts as good depends on your industry, costs, and margins, so it's best judged against your own targets and past performance.
What is the margin of safety?
The margin of safety is the gap between your actual sales and your break-even sales. It shows how far sales can fall before you stop making a profit, so a larger margin means less risk.
Does the break-even point include tax?
The basic break-even calculation focuses on fixed and variable costs rather than tax. If you want a fuller picture, you can factor tax into your fixed costs or treat a target profit as an extra cost to cover.
Related terms
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Disclaimer
This glossary is for small business owners. The definitions are written with their requirements in mind. More detailed definitions can be found in accounting textbooks or from an accounting professional. Xero does not provide accounting, tax, business or legal advice.