What is the break-even point?

The break-even point (BEP) is the sales volume at which total revenue equals total costs - the point where a business neither profits nor loses money. Every unit sold beyond the BEP generates profit.

The formulas

Break-even (units) = Fixed Costs ÷ (Price per Unit − Variable Cost per Unit)
Contribution Margin Ratio = (Price − Variable Cost) ÷ Price

Key terms

Fixed costs: costs that don't change with output - rent, salaries, insurance, equipment loans.
Variable costs: costs that change with each unit produced - raw materials, packaging, direct labor.
Contribution margin: the amount each unit contributes to covering fixed costs after variable costs are paid (Price − Variable Cost).

Break-even chart

A break-even chart plots two lines against unit volume:

Revenue line: starts at zero and slopes upward at the selling price per unit.
Total cost line: starts at the fixed cost (y-intercept) and slopes upward at the variable cost per unit.

The break-even point is where the two lines intersect. To the left of the intersection the business is losing money (costs exceed revenue); to the right it is profitable.

Margin of safety

The margin of safety is the gap between actual (or projected) sales and the break-even point. It answers: "How much can sales fall before we start losing money?"

Margin of Safety = Actual Sales − Break-even Sales

A larger margin of safety means the business can absorb demand shocks without turning unprofitable. Expressed as a percentage of actual sales, it is a key indicator in financial planning and risk management.

Sensitivity analysis

Break-even analysis becomes more useful when you test how changes in assumptions shift the BEP:

+10% fixed costs: the break-even unit count increases proportionally. If you currently break even at 1,000 units with $10,000 in fixed costs, a $1,000 rent increase raises the BEP to 1,100 units (assuming a $10 contribution margin).
−5% selling price: reduces contribution margin, requiring more units to break even. Price sensitivity is often the highest-impact variable in retail and software businesses.
+10% variable costs: increases the slope of the cost line, narrowing the contribution margin and raising the BEP.

Running multiple scenarios side-by-side gives a practical range for how robust your business model is to common real-world changes.