Break-even analysis answers the most fundamental business question: how many units do I need to sell (or how much revenue do I need) to cover all my costs? Below that point, you are losing money. Above it, every additional sale is profit.

Step 1: Fixed vs Variable Costs

Fixed costs stay the same regardless of sales volume: rent ($3,000/month), salaries ($8,000/month), software ($500/month) = $11,500/month. Variable costs scale with each unit: materials ($12/unit), shipping ($3/unit), packaging ($2/unit) = $17/unit.

Step 2: Contribution Margin

Formula — Contribution Margin
Contribution Margin = Price − Variable Cost per Unit

If you sell a product for $45 with $17 variable cost, your contribution margin is $28 per unit.

Step 3: Break-Even Calculation

Formula — Break-Even Point
Break-Even Units = Fixed Costs / Contribution Margin

$11,500 / $28 = 411 units/month. At $45 each, that is $18,495 in monthly revenue to break even.

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Key Takeaways

  • Break-Even = Fixed Costs / Contribution Margin gives you the minimum viable sales volume.
  • Higher prices raise contribution margin, lowering break-even — but may reduce demand.
  • Reducing fixed costs is the fastest way to lower your break-even point.
  • Run sensitivity analysis to see how price changes, cost increases, or demand shifts affect profitability.