What is the break-even point
The break-even point is the sales volume needed for total revenue to exactly cover all costs — fixed and variable — without generating profit or loss. Below that quantity, the business operates at a loss; above it, it starts generating profit.
Fixed costs vs. variable costs
Fixed costs don't change with sales volume, like rent, administrative salaries and software subscriptions. Variable costs change proportionally with the quantity produced or sold, like raw materials and sales commissions.
Formula
Contribution margin = Sale price − Variable cost per unit. This margin is how much each unit sold contributes toward covering fixed costs. Break-even quantity = Fixed costs / Contribution margin. Break-even revenue is that quantity multiplied by the sale price.
Why this is useful
Knowing your break-even point helps set realistic sales targets, evaluate whether a price is viable, and decide whether launching a new product or cutting fixed costs makes sense before expanding.
Frequently asked questions
What happens if I sell below the break-even point?
The business operates at a loss, because revenue isn't enough to cover all the fixed and variable costs involved in the operation.
What is contribution margin?
It's the difference between the sale price and the variable cost of each unit — in other words, how much is left from each sale to help cover the business's fixed costs.
Does this work for services, not just products?
Yes, as long as you can estimate a "variable cost per unit of service" (for example, per hour or per appointment) and a corresponding sale price.
How can I lower my break-even point?
By cutting fixed costs, lowering variable costs per unit (negotiating with suppliers, for example), or raising the sale price — any of these reduces the quantity needed to break even.