How break-even is calculated
Each unit sold contributes its price minus its variable cost toward covering fixed costs. That difference is the contribution margin. Break-even units = Fixed costs ÷ Contribution margin per unit. With 10,000 in fixed costs, a 50 price and 30 variable cost, each sale contributes 20, so you need 500 units to break even, which is 25,000 in revenue.
Fixed costs are those that do not change with volume: rent, salaries, software, insurance. Variable costs scale with each unit: materials, packaging, shipping, transaction fees, commissions.
Using it to make decisions
Price changes move break-even dramatically. Raising the price from 50 to 55 in the example cuts required volume from 500 to 400 units, a 20% easier target for a 10% price rise. Conversely, discounting 10% raises the target to 667 units, one third more sales just to stand still. Run your planned discount through the calculator before offering it.
The same math powers a margin of safety check: if current sales are 800 units and break-even is 500, sales can fall 37.5% before you lose money. Thin margins of safety argue for cutting fixed costs.
Frequently asked questions
What counts as a fixed versus variable cost?
Fixed costs stay the same whether you sell 10 units or 1,000: rent, salaries, subscriptions. Variable costs are incurred per unit sold: materials, shipping, payment fees. If a cost rises with every sale, it is variable.
What is contribution margin?
Selling price minus variable cost per unit. It is what each sale contributes toward fixed costs, and once those are covered, toward profit. As a percentage of price it is a key health metric for any product.
What if my price is below my variable cost?
Then every sale loses money and no volume can ever break even. The calculator will show no break-even point. You must raise price or cut unit costs.
Does this work for services?
Yes. Treat an hour of service (or one project) as the unit, your hourly or per-project fee as the price, and any per-delivery costs as variable costs.
Should I include my own salary in fixed costs?
For an honest picture, yes. A business that only breaks even by not paying its founder has not truly broken even.
How do taxes fit in?
Break-even is calculated before profit taxes, since below break-even there is no profit to tax. Include payroll and fixed business taxes in fixed costs, and per-sale taxes you absorb in variable costs.