Break-even point formula: how to calculate it in units and dollars

Break-even point formula in units and in dollars

The break-even point formula tells you how many units you need to sell to cover your fixed costs. The SBA's guide to startup costs gives it as: break-even point in units = fixed costs ÷ (sales price per unit – variable cost per unit). The part in brackets is what each sale leaves after its own costs, often called the contribution per unit.

To get the same point in sales dollars, the SBA divides fixed costs by the contribution margin: break-even point in sales dollars = fixed costs ÷ contribution margin. Here the contribution margin is a ratio, worked out as (sale price per unit – variable cost per unit) ÷ sale price per unit. Both formulas reach the same point; one counts units and the other counts revenue.

Round a break-even point in units up to the next whole unit. You cannot sell part of a candle, and rounding down leaves a small loss.

What is a break-even point?

The SBA defines the break-even point as the point at which total cost and total revenue are equal, meaning there is no loss or gain for your small business. Below that point the month ends in a loss. Above it, every extra unit adds its contribution to profit.

The formula depends on splitting costs into two kinds. Fixed costs are costs incurred during a specific period of time that do not change with the increase or decrease in production or services. The SBA's examples are rental lease payments, salaries, property taxes, insurance, interest, and depreciation. Variable costs, in the words of the SBA's break-even calculator, are costs that change with sales or volume. For a maker that means materials, packaging, payment fees and any postage you pay.

Some costs sit in between. The SBA calls them semi-variable costs, made of a mixture of both fixed and variable components, and gives monthly telephone services, repairs, indirect materials, indirect labor, fuel, and power as examples. Its advice is to separate out the part that is variable from the part that is fixed before you run the formula.

How to calculate break-even point in units

The SBA's calculator counts costs and sales on a monthly basis, so these steps use one month. Work out one product first; a product line follows further down.

1. List your fixed costs for the month

   Add up what you pay whether you sell nothing or sell out: rent, insurance, your store plan, software and a set ad budget. For a cost paid quarterly, the SBA says to divide that cost by four to get the monthly amount.

2. Split any mixed costs

   A phone plan with a base fee and usage charges is part fixed and part variable. Put the base fee with fixed costs and the usage with variable costs.

3. Find the variable cost per unit

   Count everything one more unit adds: materials, packaging, the platform and payment fees on the sale, and postage if you pay it. Divide bulk supplies by the number of units they make, so a case of jars becomes a cost per jar.

4. Subtract the variable cost from the price

   The selling price minus the variable cost per unit is the contribution per unit. If it is zero or less, no sales volume will break even, and the price or the costs have to change.

5. Divide fixed costs by the contribution

   Fixed costs divided by the contribution per unit is the break-even point in units. Round up to a whole unit.

6. Convert the result to sales dollars

   Multiply the break-even units by the price, or divide fixed costs by the contribution margin. Both give the revenue you need each month to break even.

Worked example: break-even point for a candle maker

Example: a maker sells soy candles from her own Shopify store for $24 each, and buyers pay for shipping. Every input is an assumption chosen to show the method, so your own numbers will differ.

Her fixed costs come to $1,200 a month:

• Shared studio space: $750
• Shopify Basic plan: $39 a month
• Liability insurance: $46
• Domain, email and design software: $65
• Equipment, spread over its working life: $100
• A set ad budget: $200

Example result: the first 80 candles each month pay the fixed costs. Candle 81 is the first to earn a profit, and each one after it adds $15. The two formulas agree, because 80 candles at $24 come to $1,920.

The card fee is the Shopify Payments online card rate on the Basic plan, 2.9% + 30¢, worked out on the candle price alone. A shipping charge paid by the buyer adds a few cents of card fee, which this example leaves out.

The SBA suggests you add a little extra, say 10%, to cover expenses you cannot predict. Example: with that buffer, fixed costs become $1,320 and the same candle breaks even at 88 a month.

Selling fees are a variable cost: one sale compared across platforms

Platform and payment fees are charged on every order, so they belong in the variable cost per unit. The same $24 candle costs a different amount to sell depending on where the buyer pays, using each platform's published rates. A monthly plan is a fixed cost instead.

Break-even analysis for a small product line

The SBA notes that its break-even analysis is based on the foundation of a single product or service. Most makers sell more than one item, and the products share the same fixed costs. For its calculator the SBA says that adding the total for all products and services monthly should account for all products and services. It adds that you may also want to do the calculation individually for each product or service if the products or service sales vary per month.

For one shared break-even point, use a blended contribution margin. Add up the contribution every product earns in a normal month, divide it by the revenue from all of them, then divide fixed costs by that blended margin. The answer is the sales in dollars you need at that product mix.

Example result: the blended contribution margin is $1,500 divided by $2,520, or 59.5%. Fixed costs of $1,200 divided by that margin give a break-even point of $2,016 in sales a month. At this mix that is 48 candles, 48 packs of wax melts and 24 room sprays, or 80% of a normal month.

The mix matters. A pack of wax melts leaves $5, a third of what a candle leaves. If buyers switch from candles to wax melts, the business needs more sales to break even, even though no cost has changed. Check each product's own contribution before you discount it or promote it.

Break-even analysis: what moves the number

A break-even analysis goes one step past the formula: it tests how the break-even point moves when price, costs or volume change. In the SBA's words, finding your break-even point will help you price your products smarter, and after the analysis you will know exactly how much you need to sell in order to be profitable.

The table reruns the candle example with one change at a time.

Example result: a $2 price rise cuts the break-even point by 9 candles, while a $4 discount adds 28. A discount needs far more sales to pay for itself than it first appears, because the whole cut comes out of the contribution per unit. The card fee also changes with the price, which is why the contribution moves by a few cents less than the price.

How long until you earn back your startup costs

Breaking even each month is different from earning back the money you spent to start. The SBA notes that some companies may take years before turning a profit. To estimate when you earn back startup costs, divide them by the monthly profit you make above the break-even point.

Example: the candle maker spent $3,000 before launch on equipment, first stock and her store. If she sells 100 candles a month, the 20 above break-even earn $15 each, or $300 a month, and she earns back the $3,000 in 10 months. At 90 candles a month it takes 20 months.

What a break-even point cannot tell you

The SBA says the break-even point is used as an estimate for lender viability and your business plan, and that it is not intended to 100% accurately determine your accounting or financing. Treat it as a planning number, and check it against your real sales and costs each month.

• It does not tell you whether buyers want that many units at your price. Demand is a separate question.
• It assumes costs stay put. Supplier prices, fee changes and a new plan all move it, so rerun it when a cost changes.
• It holds for one product mix. If your mix changes, so does the blended break-even point.

Where Nation fits

Questions about the break-even point