Break-even analysis: how to calculate it for your Canadian small business

Published Friday 31 July 2026

Table of contents

• What is break-even analysis?
• Break-even analysis formula
• How to calculate your break-even point (step by step)
• Break-even analysis example
• When to use break-even analysis
• How to lower your break-even point
• Limitations of break-even analysis
• Simplify your finances with Xero
• FAQs on break-even analysis

Key takeaways

• Break-even analysis tells you how many units you need to sell, or how much revenue you need to earn, to cover all your costs.
• Your break-even point depends on three numbers: fixed costs, variable costs per unit, and selling price per unit.
• Knowing your contribution margin helps you understand how much each sale puts toward covering fixed costs.
• Revisiting your break-even point regularly keeps your pricing, hiring, and growth decisions grounded in current numbers.

What is break-even analysis?

Break-even analysis is a calculation that shows the point where your total revenue equals your total costs. At this point, your business isn't making a profit or taking a loss.

It gives you a clear minimum sales target to aim for. Once you pass your break-even point, every additional dollar of revenue contributes directly to profit.

Fixed costs vs variable costs

To calculate your break-even point, you first need to separate your costs into two categories.

Fixed costs stay the same regardless of how much you sell. These include expenses like:

• Rent or lease payments
• Insurance premiums
• Salaries for permanent staff
• Software subscriptions

Variable costs change depending on your sales volume. Common variable costs include:

• Raw materials or inventory
• Shipping and packaging
• Sales commissions
• Payment processing fees

What is contribution margin?

Contribution margin is the amount left over from each sale after you subtract variable costs. It's the portion of revenue that goes toward covering your fixed costs.

Contribution margin per unit = selling price per unit - variable cost per unit

If you sell a product for $50 and your variable cost is $20, your contribution margin is $30. That $30 goes toward paying off your fixed costs.

You can also express this as a ratio by dividing your contribution margin by your selling price.

Contribution margin ratio = contribution margin per unit / selling price per unit

Using the same example, we just worked out the contribution margin per unit was $30 for a product that was sold for $50. This means the contribution margin ratio is 60% ($30/$50), which means 60 cent per dollar you earn goes towards covering your fixed costs.

Break-even analysis formula

There are two common formulas for calculating your break-even point.

Break-even point in units:

Break-even point (units) = fixed costs / contribution margin per unitBreak-even point in revenue:

Break-even point (dollars) = fixed costs / contribution margin ratio

How to calculate your break-even point (step by step)

Follow these five steps to find your break-even point.

1. Add up your fixed costs

List every cost your business pays regardless of sales volume, such as rent, insurance, salaries, and subscriptions. Total these for one month.

2. Determine your variable cost per unit

Calculate the cost of producing or delivering one unit, including materials, shipping, and commissions.

3. Set your selling price per unit

Identify what you charge for one unit. If you offer multiple products, the calculation gets more complex – run a separate break-even analysis for each product line, or calculate a weighted average contribution margin based on your sales mix.

4. Calculate your contribution margin

Subtract your variable cost per unit from your selling price per unit. This is the amount each sale contributes toward covering your fixed costs.

5. Divide fixed costs by contribution margin

Use the formula: fixed costs / contribution margin per unit. The result is your break-even point in units.

Break-even analysis example

Here's how break-even analysis works for a Canadian small business.

Sarah owns a candle-making business in Vancouver and sells each candle for $35.

Monthly fixed costs:

• Studio rent: $1,500
• Insurance: $200
• Website and software: $150
• Salary (one part-time employee): $2,150

Total fixed costs: $4,000 per month

Variable costs per candle:

• Wax, wicks, and fragrance: $8
• Packaging: $3
• Shipping: $4

Total variable cost per unit: $15

Break-even point calculation:

Now Sarah can calculate her break-even point.

• Contribution margin per unit: $35 - $15 = $20
• Break-even point in units: $4,000 / $20 = 200 candles
• Break-even point in revenue: 200 x $35 = $7,000

Sarah needs to sell 200 candles per month to cover her costs. Every candle beyond 200 generates $20 of profit.

When to use break-even analysis

Break-even analysis is useful at many stages of running a business.

• Launching a new business: Estimate your expected sales volume and check whether your pricing and cost structure can realistically cover your costs.
• Introducing a new product: Estimate the sales volume you'd need to cover the costs of a new product before you commit to it.
• Changing your prices: See how a change in pricing or costs affects the number of sales you need.
• Applying for financing: Lenders often want a break-even analysis as part of your business plan.
• Hiring new staff: Recalculate after adding an employee to see how many more sales you'll need to absorb the higher fixed costs.

How to lower your break-even point

A lower break-even point means your business reaches profitability sooner. There are a few practical ways to get there.

• Reduce your fixed costs by renegotiating your lease, switching to more affordable software, or finding competitive insurance rates.
• Lower your variable costs by sourcing more affordable materials or negotiating better supplier rates.
• Raise your prices to increase your contribution margin. Even a modest increase can make a meaningful difference.

Limitations of break-even analysis

Break-even analysis is a helpful planning tool, but it has some limitations to keep in mind.

For a start, it assumes your selling price and variable costs stay constant at every level of production. In practice, buying in larger quantities may lower the cost of materials, and you might offer seasonal discounts.

It’s also a static calculation. Change any variable – rent, supplier rates, your prices – and your break-even point changes.

Treat your break-even calculation as a starting point and revisit it regularly as your costs and pricing evolve.

Simplify your finances with Xero

Tracking your costs, revenue, and profitability is easier when your financial data is organized in one place. Xero's online accounting software gives you real-time dashboards, automated bank feeds, and clear financial reports, so calculating your break-even point becomes a simple, routine task.

Ready to take the guesswork out of your finances? Try Xero and get one month free.

FAQs on break-even analysis

Here are answers to common questions about break-even analysis for Canadian small businesses.

What is a good break-even point?

There’s no universal answer. A lower break-even is generally better, as it means you need fewer sales to turn a profit. For your business, a “good” break-even is one you can realistically hit. Try to find ways to bring your break-even point down to improve it.

How often should you recalculate your break-even point?

Recalculate whenever your costs or pricing change significantly. Reviewing it quarterly is a good general practice.

Can you do a break-even analysis for a service-based business?

Yes. Use your hourly rate or project fee as the selling price and calculate the variable cost per hour or per project. The same formula applies.

Does break-even analysis account for taxes?

The standard formula does not include taxes. At the break-even point itself, there’s no tax anyway, as profit is zero.. But tax does need to be factored in when assessing profitability past the break-even point.