Table of Contents
Break-Even Analysis: What It Is and How the Break-Even Point Is Calculated
- CLFI Team
- 4 min read
Break-even analysis helps answer a simple but important question: how is the break-even point calculated? It identifies the level of sales at which a business covers all of its costs but earns no profit and incurs no loss. Once you understand what break-even analysis is and how it is calculated, you can test different prices, volumes, and cost structures before making decisions.
Break-Even Analysis
What Is Break-Even Analysis?
Break-even analysis compares a company’s revenues with its costs. The break-even point is the level of sales where total revenue equals total cost. At that point, the business covers all fixed and variable costs but does not yet earn a profit. As soon as it moves beyond the break-even point, each extra unit sold starts to generate profit.
Managers often ask, how is the break-even point calculated in practice? The answer depends on what they want to analyse. They may focus on the total sales in currency terms, the number of units that must be sold, or the price per unit required to break even. These three views use the same logic but apply it from different angles.
Fixed and Variable Costs
Before you calculate any break-even point, you need to separate fixed costs from variable costs. Fixed costs are expenses that do not change with the level of output in the short term, such as rent, salaries, or insurance. Variable costs move with sales volume, such as materials, direct labour per unit, or shipping costs.
The break-even calculation uses fixed costs in the numerator and a version of the contribution margin in the denominator. Because of this, understanding how costs behave is essential. If you misclassify a cost, the break-even analysis will give misleading results, and decisions built on it will be less reliable.
Contribution Margin Explained
The contribution margin shows how much each unit sold contributes to covering fixed costs and then generating profit. You can calculate it in two main ways. First, at unit level:
Second, as a percentage of sales (the contribution margin ratio):
You can also express the ratio as: 1 − (Variable costs ÷ Revenue). This form is useful when you start from total revenues and total variable costs rather than per-unit numbers.
Types of Break-Even Analysis
You can analyse the break-even point in three main ways:
- the total break-even sales needed in currency terms,
- the break-even units that must be sold, and
- the break-even price required, given a target volume.
Each type of break-even analysis answers a slightly different management question. However, they all rely on the same building blocks: fixed costs, variable costs, and contribution margin.
Break-Even Total Sales
Sometimes managers want to know the total revenue needed to cover all costs. In that case, they calculate the break-even point in terms of sales value:
Break-Even Units Sold
More often, decision-makers ask how many units they must sell to reach the break-even point. In that case, they use the contribution margin per unit:
Break-Even Price
Sometimes the volume is fixed, for example due to capacity, but price is flexible. In that situation, management may ask, what price per unit do we need to break even? If you know the number of units you expect to sell, you can rearrange the logic:
This formula shows that the price must cover both the variable cost and a share of fixed costs per unit. Anything above that break-even price will contribute to profit.
Break-Even Examples: Sales, Units, and Price
The following examples show how the break-even point is calculated in each of the three ways. They use consistent numbers so you can see how the different formulas relate to the same business case.
Example 1 — Break-Even Total Sales
Using fixed costs and the contribution margin ratio to calculate break-even sales in currency terms.
Assume a company has annual fixed costs of $10,000. The product sells for $200 per unit and the variable cost per unit is $80. We want to know the total sales revenue required to break even.
| Price per unit | $200 |
| Variable cost per unit | $80 |
| Contribution margin per unit | $120 |
| Contribution margin ratio | $120 ÷ $200 = 0.60 (60%) |
Example 2 — Break-Even Units
How many units must be sold to reach the break-even point?
We use the same business: fixed costs of $10,000, price of $200 per unit, and variable cost of $80 per unit. Now we want to know the number of units required to break even.
| Contribution margin per unit | $200 − $80 = $120 |
Example 3 — Break-Even Price
What price is needed to break even at a given volume?
Suppose the company expects to sell 100 units. Fixed costs remain at $10,000, and the variable cost is still $80 per unit. We now ask: what price per unit achieves break-even?
Interpretation. These examples show three ways to answer the same question:
how is the break-even point calculated? You can look at it in terms of total sales, units, or price, depending on which decision you face.
The key insight is that all three views rely on fixed costs, variable costs, and contribution margin.
In Practice
In practice, break-even analysis gives managers and founders a simple way to test business ideas before committing resources.
They can see how many units they need to sell, what total revenue they must reach, or which price range is realistic.
As a result, they gain a clearer view of risk: how far actual sales can fall before the business moves into loss.
The break-even point also affects key financial metrics.
It links directly to operating leverage, since a higher fixed-cost base raises the break-even level and increases profit sensitivity to volume.
Understanding where the break-even point sits relative to current sales helps boards and investors assess resilience, pricing power, and the impact of cost changes on profitability.
Within the broader Accounting Series, break-even analysis connects naturally to margin analysis, budgeting, and scenario planning.
It supports decisions on product mix, capacity investment, and discount policies.
Later, when you examine valuation and deal-making, the same logic underpins sensitivity analysis around revenue forecasts, cost structures, and strategic pricing choices.
Definition
Balance Sheet
A financial statement showing what a business owns and owes at a specific point in time, summarising assets, liabilities, and equity. For a step-by-step guide to interpreting it, read How to Read a Balance Sheet – Finance for Non-Finance Managers .
Programme Content Overview
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Chart: Percentage weighting of each core course within the CLFI Executive Certificate curriculum.
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