Your break-even point is the level of sales at which total revenue exactly covers total costs: no profit, no loss. Below it, you’re losing money. Above it, every sale adds to profit. Knowing the number turns vague worries (“are we selling enough?”) into a concrete target.
Step 1: Separate fixed and variable costs
Fixed costs stay the same regardless of how much you sell within a period: rent, insurance, salaries, software subscriptions, loan payments.
Variable costs rise with each unit sold: materials, packaging, shipping, sales commissions, card processing fees.
Some costs are mixed — a utility bill with a fixed base charge and a usage component, for example. Split them as best you can. Precision matters less than consistency.
Step 2: Calculate contribution margin
Contribution margin is what each sale contributes toward fixed costs after covering its own variable costs.
- Contribution Margin
- equals Selling Price − Variable Cost per Unit
- Contribution Margin Ratio
- equals Contribution Margin ÷ Selling Price
Step 3: Divide fixed costs by contribution margin
- Break-even Units
- equals Fixed Costs ÷ Contribution Margin
- Break-even Revenue
- equals Fixed Costs ÷ Contribution Margin Ratio
A worked example
A small studio sells pottery classes at $32 per seat. Clay, glaze and kiln energy cost about $12 per student. Monthly fixed costs — rent, insurance and equipment financing — total $6,000.
- Contribution margin = $32 − $12 = $20.00 per seat (62.5%)
- Break-even = $6,000 ÷ $20 = 300 seats per month
- Break-even revenue = $9,600
Using break-even to test decisions
The real value of break-even analysis is in comparing scenarios.
Raising the price
If the studio raises its price to $35, the contribution margin rises to $23.00 and break-even falls to 261 seats — 39 fewer each month. A 9% price increase cut the break-even point by about 13%, because the whole increase flows to contribution margin.
Adding a fixed cost
Hiring a part-time instructor for $3,500 a month raises fixed costs to $9,500 and the break-even point to 475 seats. The question becomes: will the extra instructor make it possible to fill 175 more seats a month?
Limitations
- It assumes price and variable cost per unit are constant. Volume discounts and promotions change both.
- Fixed costs are only fixed within a range — at some volume you’ll need more space or staff.
- For multiple products, use a weighted average based on your typical sales mix, and revisit it when the mix changes.
Run your own numbers with the Break-Even Calculator.
This guide is general information, not financial, tax or legal advice. See our disclaimer.