Break-Even Point Formula, With Worked Examples

By Newtown Analytics · October 21, 2026 · 6 min read

For smb owners & operators

The break-even point formula divides fixed costs by contribution, and it comes in two forms: break-even units, using contribution per unit, and break-even revenue, using the contribution margin ratio. Both give the same answer, and the choice depends on whether you think in units sold or in sales dollars. This guide states the formulas, derives them, and works five examples: a single product, a restaurant measured in revenue, an after-tax profit target, a margin of safety with operating leverage, and a multi-product mix. It belongs to unit economics and budgeting and forecasting, builds on break-even analysis and the contribution margin formula, and leads to break-even analysis for a new product and cost-volume-profit analysis.

The formulas

Break-even units   = Fixed costs / (Price per unit - Variable cost per unit)
Break-even revenue = Fixed costs / Contribution margin ratio
Contribution margin ratio = (Price - Variable cost) / Price

Where it comes from

Profit equals revenue minus variable costs minus fixed costs. With price P, variable cost V per unit, fixed costs F and quantity Q:

Profit = P × Q - V × Q - F = (P - V) × Q - F

Setting profit to zero gives (P - V) × Q = F, so Q = F / (P - V). Multiplying both sides by the price gives revenue at break-even: P × Q = F × P / (P - V) = F / ((P - V) / P) = F / contribution margin ratio.

Example 1: break-even in units

A product sells for $25, with a variable cost of $15. Fixed costs are $90,000 a year.

Contribution per unit = 25 - 15 = $10
Break-even units = 90,000 / 10 = 9,000 units
Break-even revenue = 9,000 × 25 = $225,000
Check with the ratio: 10 / 25 = 40 percent; 90,000 / 0.40 = $225,000 ✓

Example 2: a restaurant, in revenue

A restaurant has fixed costs of $60,000 a month (rent, salaried staff, insurance, utilities, software). Variable costs, such as food, packaging, hourly labor scheduled to demand and card fees, average 35 percent of sales.

Contribution margin ratio = 1 - 0.35 = 65%
Break-even revenue = 60,000 / 0.65 = $92,308 a month
At an average check of $22, covers needed = 92,308 / 22 = 4,196 a month, or about 140 a day (4,196 / 30 = 139.9)

Revenue-based break-even is natural where the "unit" is hard to define, such as a restaurant, a store or a service business with varied jobs.

Example 3: after-tax profit target

The business in Example 1 wants an after-tax profit of $30,000. With a tax rate of 25 percent, pre-tax profit must be 30,000 / (1 - 0.25) = $40,000.

Units required = (fixed costs + pre-tax target) / contribution per unit = (90,000 + 40,000) / 10 = 13,000 units.

Revenue required = 13,000 × 25 = $325,000. If the target had been entered without grossing up for tax, the answer would have been (90,000 + 30,000) / 10 = 12,000 units, and the business would have fallen short.

Example 4: margin of safety and operating leverage

Expected sales in Example 1 are 12,000 units.

Margin of safety = (12,000 - 9,000) / 12,000 = 25%
Total contribution = 12,000 × 10 = $120,000
Profit = 120,000 - 90,000 = $30,000
Degree of operating leverage = contribution / profit = 120,000 / 30,000 = 4.0

A degree of operating leverage of 4 means a 10 percent increase in units raises profit by about 40 percent (to 13,200 units: 13,200 × 10 - 90,000 = $42,000, up 40 percent), and a 10 percent decline cuts it by about 40 percent (to 10,800 units: $18,000, down 40 percent). The same fixed costs that make profit rise quickly make it fall quickly. See operating leverage.

Example 5: multiple products

A business sells two products. Fixed costs are $70,000. Sixty percent of units sold are Product A, with a contribution of $10, and 40 percent are Product B, with a contribution of $20.

Weighted contribution per unit = 0.60 × 10 + 0.40 × 20 = 6 + 8 = $14
Break-even units = 70,000 / 14 = 5,000 units
Of which A = 3,000 units and B = 2,000 units

If the mix shifts to 80 percent A and 20 percent B, weighted contribution falls to 0.8 × 10 + 0.2 × 20 = 8 + 4 = $12, and break-even rises to 70,000 / 12 = 5,833 units. The break-even point depends on the assumed mix, so recompute it when the mix changes. See product mix analysis.

Spreadsheet formulas

Break-even units:            =ROUNDUP(FixedCosts/(Price-VariableCost),0)
Break-even revenue:          =FixedCosts/((Price-VariableCost)/Price)
Units for target profit:     =ROUNDUP((FixedCosts+TargetProfit)/(Price-VariableCost),0)
Pre-tax target from after-tax: =AfterTaxTarget/(1-TaxRate)
Margin of safety:            =(ExpectedUnits-BreakEvenUnits)/ExpectedUnits
Operating leverage:          =TotalContribution/Profit

Round break-even units up, because you cannot sell a fraction of a unit and still cover costs.

Variations

Variation	Adjustment
Cash break-even	Remove non-cash fixed costs such as depreciation, add debt principal repayments
Break-even with step costs	Recompute for each range, since fixed costs jump at capacity thresholds
Break-even with price tiers	Use the weighted average price
Break-even with a launch investment	Add the investment to fixed costs, or see break-even analysis for a new product
Break-even in time	Estimate when cumulative contribution passes cumulative fixed costs

Common mistakes

Using list price rather than net price.
Leaving out semi-variable costs or treating them as purely fixed.
Using revenue instead of contribution in the denominator.
Not rounding up.
Forgetting to gross up an after-tax target.
Using a single mix when the mix is changing.
Treating the result as exact instead of testing a range.

Choosing the unit

The formula works with any unit that makes sense for the business, provided price and variable cost are expressed per unit. A consulting firm can use billable hours, a delivery company can use deliveries, a hotel can use occupied room nights and a software company can use subscribers. Take a hotel with 50 rooms, an average rate of $140 and variable cost per occupied room night of $35 (cleaning, supplies and laundry). Contribution is $105 per room night. With monthly fixed costs of $135,000, break-even is 135,000 / 105 = 1,285.7, or 1,286 room nights a month. With 50 rooms and 30 days, capacity is 1,500 room nights, so break-even occupancy is 1,286 / 1,500 = 85.7%. Expressing the result as occupancy makes it easy to compare with actual performance and to see that the margin of safety is thin.

When the formula breaks down

The formula assumes that price and variable cost per unit are constant and that fixed costs stay fixed over the range. If you give volume discounts, the average price falls as volume rises, and break-even is higher than the simple formula suggests. If you have to add shifts or space near capacity, fixed costs step up. In those cases, calculate break-even for each range separately, or build a small table of profit at different volumes and see where it crosses zero. Treat the formula as a first estimate and the table as the check.

FAQs

What is the break-even point formula?

Fixed costs divided by contribution per unit gives break-even units. Fixed costs divided by the contribution margin ratio gives break-even revenue.

How do I calculate break-even revenue?

Divide fixed costs by the contribution margin ratio, which is price minus variable cost, divided by price.

What is the difference between break-even units and revenue?

Units tell you how many to sell, revenue tells you the sales dollars needed. They are two views of the same point.

How do I include a profit target?

Add the pre-tax profit target to fixed costs before dividing. Gross up an after-tax target by dividing by one minus the tax rate.

Can break-even be negative?

No. If contribution per unit is zero or negative, there is no break-even point, because each unit sold loses money or adds nothing.

This article is for general information. It is not accounting, tax, legal or investment advice, and examples use illustrative numbers rather than client data. Confirm decisions that carry financial or legal consequences with a qualified professional.