How break-even analysis works
Your break-even point is the number of sales at which total income equals total costs. Below it you make a loss; above it every extra sale adds profit.
Costs fall into two groups:
- Fixed costs stay the same whatever you sell in a period: rent, salaries, insurance, software and loan repayments.
- Variable costs rise with every unit: materials, packaging, shipping, payment fees and marketplace commission.
Each sale first pays its own variable cost. Whatever is left, the contribution, goes towards fixed costs.
Break-even units = Fixed costs ÷ Contribution per unit
Break-even sales = Break-even units × Price
Worked example 1: a small product business
A maker sells handmade soap at $8 a bar. Each bar costs $3 in ingredients, packaging and fees. Monthly fixed costs (workshop rent, website, insurance) are $1,500.
- Contribution: $8 − $3 = $5 per bar
- Break-even: $1,500 ÷ $5 = 300 bars a month
- Break-even sales: 300 × $8 = $2,400
Bar 301 is the first that makes a profit, and each bar after that adds $5.
Worked example 2: adding a profit target
The same maker wants to earn $2,000 a month for themselves. Add the target to fixed costs:
($1,500 + $2,000) ÷ $5 = 700 bars a month, or $5,600 of sales.
Worked example 3: the price you need
A consultant expects to sell 40 workshop seats a month. Each seat has $25 of variable cost (materials, room hire per head, payment fees). Fixed costs are $4,000 a month. What price breaks even?
$25 + $4,000 ÷ 40 = $125 a seat. Use the Price to break even tab above for this.
The contribution margin ratio
Contribution as a share of the price tells you how much of every sale goes to fixed costs.
For the soap it is $5 ÷ $8 = 62.5%. You can also find break-even sales directly: $1,500 ÷ 0.625 = $2,400. This is handy for a shop with many products of different prices.
Margin of safety
Once you know your break-even, compare it with what you actually expect to sell:
If you expect to sell 400 bars and break even at 300, your margin of safety is 25%. Sales could fall by a quarter before you make a loss.
Tips and edge cases
- Price at or below variable cost means no break-even. Every sale loses money, so selling more makes it worse. The calculator warns you.
- Units are rounded up. You cannot sell 333.3 bars, so the answer shows 334.
- Use the same period for everything. Monthly fixed costs give monthly break-even units.
- Fees are variable costs. Card and marketplace fees grow with sales. Use the Stripe fee calculator or Etsy fee calculator to find them per sale.
- Real life is lumpier. Fixed costs jump when you hire someone or move to a bigger unit. Recalculate at each step.
To set prices that leave enough contribution, try the profit margin calculator and the markup calculator.