What the break-even point is
Every business has fixed costs, which exist regardless of how much is sold (rent, administrative salaries, software), and variable costs, which grow along with sales volume (raw materials, commissions, packaging). The break-even point is the sales volume at which total revenue exactly covers all those costs, with nothing left over and nothing missing — profit at that point is zero. Selling below that means operating at a loss; selling above it, every extra unit starts generating real profit.
Formulas used
Contribution margin per unit: contribution margin = selling price − variable cost per unit
Break-even point in units: BEP (units) = fixed costs ÷ contribution margin
Break-even point in revenue: BEP (revenue) = BEP (units) × selling price
Units for a profit target: units = (fixed costs + target profit) ÷ contribution margin
Margin of safety: margin of safety (%) = ((current sales − BEP) ÷ current sales) × 100
Practical example: break-even point
With $10,000 in monthly fixed costs, a $50 selling price per unit, and a $30 variable cost per unit, the contribution margin is $20 per unit. The break-even point is 500 units a month ($10,000 ÷ $20), which equals $25,000 in revenue. Selling fewer than 500 units, the business operates at a loss; selling more, each additional unit generates $20 of profit.
Practical example: units for a profit target
Using the same numbers, hitting a $5,000 monthly profit target would require 750 units sold per month (($10,000 + $5,000) ÷ $20), generating $37,500 in revenue. Notice the gap between those 750 units and the 500-unit break-even point (250 units) is exactly enough to generate the extra $5,000 in profit, since each additional unit contributes $20.
Practical example: margin of safety
If the business is selling 800 units a month, well above the 500-unit break-even point, the margin of safety is 300 units, or 37.5% of current sales. That means sales could drop by up to 37.5% before the business starts operating at a loss — a direct indicator of how much cushion exists between current volume and the risk of a loss.
Why the contribution margin is the key piece
Notice the contribution margin (price minus variable cost) shows up in all three formulas — it's how much each unit sold actually contributes toward paying fixed costs, before generating profit. The higher the contribution margin, the fewer units are needed to reach break-even or any profit target, which is one reason raising the selling price or cutting the variable cost has such a direct effect on a business's viability.
What this calculator doesn't account for
This model assumes the selling price and variable cost per unit stay constant regardless of volume sold, which isn't always realistic (volume discounts, limited production capacity, degressive variable costs). It also doesn't include sales taxes or seasonal swings in fixed costs. Use the results as an initial planning reference.