Break-even analysis answers a simple question: how much do I need to sell before I stop losing money? It is one of the most useful calculations for a new product, a price change or a decision to hire. Here is the formula and a full worked example you can adapt.
The three inputs
- Fixed costs: costs that don't change with how much you sell, over a period. Rent, software subscriptions, insurance, salaried staff, loan payments.
- Selling price per unit: what the customer pays, excluding sales tax.
- Variable cost per unit: costs that rise with each sale. Materials, packaging, payment and marketplace fees, shipping you pay, per-unit labor.
The formulas
- Contribution margin per unit = Price − Variable cost
- Contribution margin ratio = Contribution margin ÷ Price
- Break-even units = Fixed costs ÷ Contribution margin per unit
- Break-even revenue = Fixed costs ÷ Contribution margin ratio
- Units for a target profit = (Fixed costs + Target profit) ÷ Contribution margin per unit
Worked example: a candle business
Monthly numbers:
- Fixed costs: $4,000 (workshop rent $1,800, software and website $200, part-time helper $2,000)
- Price: $25 per candle
- Variable cost: $9 per candle (wax, wick, jar, label $6; packaging $1; payment fees and shipping supplies $2)
Step by step:
- Contribution margin = $25 − $9 = $16 per candle
- Contribution margin ratio = 16 ÷ 25 = 64%
- Break-even units = $4,000 ÷ $16 = 250 candles a month
- Break-even revenue = $4,000 ÷ 0.64 = $6,250 a month
Each candle contributes $16 toward fixed costs. After 250 candles, fixed costs are covered and each additional candle adds $16 of profit.
Check it: 250 × $25 = $6,250 revenue; 250 × $9 = $2,250 variable costs; $6,250 − $2,250 − $4,000 = $0. ✔
You can run these numbers in the free break-even calculator.
Adding a target profit
If the owner wants $2,000 profit a month:
Units = ($4,000 + $2,000) ÷ $16 = 375 candles, or $9,375 of revenue.
That's 50% more units than break-even. Seeing the jump in black and white often changes plans. Maybe the price is too low, or the fixed costs are too high for the current volume.
What-if analysis: price vs cost changes
| Change | Contribution / unit | Break-even units |
|---|---|---|
| Base case ($25 price, $9 cost) | $16 | 250 |
| Raise price to $28 | $19 | 211 |
| Cut price to $22 | $13 | 308 |
| Variable cost rises to $11 | $14 | 286 |
| Fixed costs rise to $5,000 | $16 | 313 |
A $3 price increase cuts the units needed by about 16%. A $3 discount raises them by about 23%. Discounts are more expensive than they look, because they come straight out of contribution margin.
Common mistakes
- Leaving fees out of variable cost. Marketplace and payment fees are per-sale costs. On a platform like Etsy they can be 10% or more of the order. See how much Etsy fees take and the marketplace fee calculator.
- Ignoring your own pay. If you work in the business, include a reasonable owner salary in fixed costs, or the "break-even" business can't pay you.
- Mixing periods. Monthly fixed costs need monthly units. Annual costs need annual units.
- Multiple products. With several products, use a weighted-average contribution margin based on your sales mix, or calculate break-even per product line with its own fixed costs.
- Using markup instead of margin. A 64% contribution ratio is a margin, not a markup. See margin vs markup.
Break-even in days or months
If you sell about 10 candles a day, the 250-candle break-even is reached around day 25 of the month. For a new product with an upfront investment (molds, a first inventory batch, a launch campaign), you can also calculate the payback period:
Payback (months) = Upfront investment ÷ Monthly profit after fixed costs
Frequently asked questions
Is break-even the same as profitability? No. Break-even is the point where profit is exactly zero. It's the minimum, not the goal. Add a target profit (including a fair owner salary) to see the volume a healthy business needs.
Should I include one-off startup costs in fixed costs? Keep them separate. Use monthly fixed costs for the break-even point, and calculate a payback period for the one-off investment.
What if my variable cost changes with volume? Bulk discounts lower the variable cost at higher volumes. Run the calculation at the cost you'll actually pay at the volume you expect, and redo it if you cross a discount tier.
How does break-even change with a discount campaign? A discount lowers the contribution per unit, so the units needed rise faster than the discount percentage suggests. Always check break-even before running a sale.
Key takeaways
- Break-even units = Fixed costs ÷ (Price − Variable cost).
- Include fees, packaging and your own pay, or the result is too optimistic.
- Small price changes move break-even a lot; discounts cost more than they look.
- Recalculate whenever costs or prices change.
Doing it for a whole catalog
Calculating break-even for one product is easy. Keeping cost, margin and break-even updated for 30 products when supplier prices change is where spreadsheets save hours. The Product Cost & Break-even Calculator template costs every product, sets prices by target margin and shows break-even units across the catalog.