What is the break-even formula? Definition and examples

By Indeed Editorial Team

Published 30 June 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

A break-even formula is a mathematical tool that allows you to determine the point at which both sides are equal. Though the break-even formula can apply to many situations in business, it often applies when a business has equal revenues and costs. If you're a businessperson, learning more about the break-even formula can be beneficial. In this article, we explain what the break-even formula is, describe the break-even point, detail how to use the formula, review how to interpret results and provide examples you can review to better understand breaking even.

What is the break-even formula?

Learning the answer to 'what is the break-even formula?' can help you better understand how to use it in the workplace. Break-even formulas are tools that business people can use to learn more about products and sales. They can apply to many concepts in business, including product prices and revenues. There are two formulas to calculate the break-even point, one for per unit sold and one for sales revenues. In the first formula, you divide the total fixed costs by the difference between the unit price and variable costs. The formula looks like this:

Break-even point in units = fixed costs / (price - variable costs)

In the second formula, you divide the total fixed costs by the contribution margin (the sales revenue minus the variable costs).

Break-even point in sales = fixed costs / contribution margin

Business owners use this formula to determine when their business can become profitable. You can also use it to determine whether you can consider cutting costs or looking for alternative means of generating revenue.

What is the break-even point?

The break-even point in production is the level at which revenue is equal to costs. This means when a manufacturer produces a product or service, the amount they sell it for equals the amount it costs to create it. To be profitable, companies and businesses sell their goods for more than the break-even price. Understanding when a product or service reaches the break-even point can help you determine how many products to sell to be profitable or whether a business idea is viable.

In investing, the break-even point is when the price of the investment is equal to its market value. If you manage investment funds, understanding the break-even point can help you determine when to purchase more investments and when to sell them. Creating an effective portfolio can be simpler when you understand the break-even point and how it affects the value of each investment.

How to use the break-even formula for sales

Learning how to use the break-even formula for sales can help business, marketing and accounting professionals improve their performance and accuracy. Follow these steps to find your break-even point in sales:

1. Calculate your company's fixed costs

Your company's fixed costs include things such as utilities, rent, insurance, property taxes and loan payments. Fixed costs include any of your company's expenses that aren't impacted by the cost of providing your service. Many companies choose to keep monthly or quarterly accounts of their fixed accounts and accessing these accounts and keeping them updated can make using the break-even formula easier.

2. Gather information about variable costs

These are company expenses that fluctuate with sales. Examples of variable costs include materials and freight and commissions paid to salespeople. If you have a car wash, an example of a variable cost may be the materials and soap you use to wash the cars. The more cars you wash, the more your variable costs may increase.

3. Determine product price

Determining the sale price of a service is important, as you may want the price to be at least as high as your cost of providing the service. When you're starting a new business or launching a new product, you may choose to price your service lower to attract new customers. This is penetration pricing, but there are many pricing strategies you can use, including price skimming and premium pricing.

4. Learn about the contribution margin

The contribution margin shows how much sales revenue contributes to paying for fixed company costs and generating profit. You can calculate the contribution margin by subtracting variable costs from the sale price. Understanding the contribution margin helps you determine how each specific product contributes to the company's profits. The contribution model represents the amount of money generated after recovering variable costs.

5. Calculate the break-even point for sales

Divide the fixed costs by the contribution margin. You can use this formula and insert the information about costs and prices to determine what the break-even point is. For example, if a company has a sales price per unit of $10 and variable costs of $2 per unit, the break-even point for that product is $0.80 per unit.

Break even point = (Sales price per unit - Variable costs per unit) / Sales price per unit

$0.80 per unit = ($10 per unit - $2 per unit) / $10 per unit

How to use the break-even point for units

You can accomplish this in the same way as the break-even point for sales, but substitute units for sales. Using this formula can help you determine how many units to sell to make back the money you spend in production. For example, if a company has fixed costs of $5,000 per month, sells their product for $1 and pays $0.10 to create the product, they sell 5,556 to reach the break-even point. This is the break-even formula for units:

Break-even point in units = fixed costs / (price - variable costs)

5,556 units = $5,000 / ($1.00 - $0.10)

Methods for interpreting break-even formula results

Understanding a break-even point can help you make more informed business decisions. It can tell you whether a company can cut costs, raise prices or simply determine the number of products to sell to break even. Here are some ways you can interpret the data and use it in your daily operations:

Setting prices: You can use the data to determine if your pricing is too low or whether you can raise pricing to break even faster.
Tracking costs: By identifying your break-even point, you can also keep track of your business costs. You may find that you're paying too much for materials and thus reducing your profit. The break-even point can also steer you towards ways to cut costs, such as reducing overhead or changing vendors.
Motivating employees: You can use the break-even point as a tool to motivate your team. Having clear goals and knowing exactly what you expect of them can make employees feel like valued members of the company.

Examples of the break-even formula

Reviewing examples of the break-even formula can help you learn more about how to use it in your workplace. Depending on why you use break-even formulas, you may arrange them differently to calculate for unit or price. These are some examples of how organisations can use the break-even formula:

Example 1

Turner Corporation is launching a new product and wants to determine how many of the products it may sell before it becomes profitable. It has calculated that the fixed costs include its lease, executive salaries, property taxes and depreciation of assets, which together add up to $70,000 per month.

The variable costs associated with producing the product are the cost of factory labour, sales commissions and materials used to build the product. The variable costs, once calculated, are $0.90 per unit. The product is priced at $2.00 each. With this information, we can calculate the break-even point using our formula.

Fixed costs / (price - variable costs) = Break-even point in units

$70,000 / ($2.00 - $0.90) = 63,637 units

This means that Turner Corporation has to sell 63,637 units per month to cover all of its expenses and reach the break-even point.

Example 2

A toy company produces small trinkets for children and wants to determine how to price their toys. To do this, the marketers or pricing specialists divide the fixed costs by the contribution margin. The sales price per toy is $2 and variable costs of $0.50 per unit, so the break-even point for the toy is $0.80 per unit.