Income
Break-Even Point: Definition & Example
Also called: Break-even analysis
What Is the Break-Even Point?
The break-even point is the level of sales at which a business’s revenue exactly covers its costs, so it makes neither a profit nor a loss.
What does Break-Even Point mean?
Break-even units equal fixed costs divided by the contribution each sale makes, which is the price minus the variable cost per unit. Fixed costs stay the same whatever you sell, such as rent, salaries, insurance, and loan payments. Variable costs rise with each sale, such as materials, packaging, and card fees.
Break-even revenue is the break-even units multiplied by the price, or fixed costs divided by the contribution margin percentage. Every sale beyond the break-even point adds its full contribution to profit.
Lenders and investors use break-even analysis to judge whether a business plan is realistic. Taking on a loan adds the monthly payment to fixed costs, which raises the sales the business needs just to stay even.
Break-Even Point example
A coffee cart has $12,000 a month in fixed costs, sells drinks for $5, and spends $2 per drink on coffee, milk, and cups. Each drink contributes $3, so the cart breaks even at 4,000 drinks a month, or $20,000 in sales.
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Related terms
- Profit MarginProfit margin is profit as a percentage of revenue. Gross margin subtracts only the direct cost of what was sold; net margin subtracts every expense.
- MarkupMarkup is the amount added to the cost of a product or service to set its selling price, usually stated as a percentage of the cost.
- Cash FlowCash flow is the movement of money into and out of an account, household, business, or property over a period. Positive cash flow means more money came in than went out.
- Net IncomeNet income is what remains after deductions. For a person, it is take-home pay after taxes and withholdings. For a business, it is profit after all expenses.
Break-Even Point FAQ
- How do you calculate the break-even point?
- Divide fixed costs by the contribution per unit, which is the price minus the variable cost per unit. $12,000 of fixed costs and $3 of contribution per sale means 4,000 sales to break even.
- What happens if the price is below the variable cost?
- The business can never break even. Each sale loses money before fixed costs are counted, so selling more makes the loss bigger.
- Does a rental property have a break-even point?
- Yes. For a rental it is usually expressed as break-even occupancy: the share of units that must be rented for rent to cover operating expenses and the mortgage.
