Contribution margin = price per unit − variable cost per unit. Break-even units = fixed costs ÷ contribution margin. Break-even revenue = break-even units × price per unit. Once you cross this number, every additional sale is profit.
Break-even analysis tells you the minimum volume you need before a product or service is worth doing. It's the single fastest way to sanity-check a new offer, a price change, or a decision to add staff — before you commit real money.
Fixed costs stay the same no matter how much you sell — rent, salaries, insurance, software subscriptions. Variable costs scale with each sale — materials, packaging, payment processing fees, direct labor per unit. Getting this split right is what makes the break-even number accurate.
Say your fixed costs are $5,000/month, you sell a product for $25, and it costs you $10 in materials and processing per unit. Your contribution margin is $15 ($25 minus $10), so you need $5,000 divided by $15, or 334 units a month, to break even. Sell fewer than that and you're losing money; sell more and every extra unit is pure profit at that $15 margin.
What if my contribution margin is negative? That means your variable cost per unit is higher than your price — you lose money on every sale regardless of volume. Fix the pricing or cost structure before scaling.
Does break-even include profit? No — break-even is the point where revenue exactly equals costs, profit is $0. To target a specific profit number, add your profit goal to fixed costs before dividing by contribution margin.
How often should I recalculate this? Any time a major cost changes — rent increase, new hire, supplier price change, or a price adjustment on your product. Many businesses recheck quarterly at minimum.