How do you calculate the break-even point?

Divide your fixed costs by the contribution per unit, where contribution per unit is the selling price minus the variable cost of one unit. For example, fixed costs of £6,000 a month and a contribution of £20 a unit give a break-even point of 300 units a month.

What is the break-even formula in pounds of sales rather than units?

Divide fixed costs by the contribution to sales ratio, which is contribution divided by sales. If each £50 sale contributes £20, the ratio is 40%, so £6,000 of fixed costs needs £15,000 of sales to break even.

What is the difference between fixed and variable costs?

Fixed costs stay the same whatever you sell in the period, such as rent or insurance. Variable costs move with sales, such as materials or delivery for each item. Some costs are semi-fixed, such as a phone bill with a fixed rental and a charge for usage, so split them into a fixed part and a variable part.

What is the margin of safety?

It shows how far sales can fall before you make a loss. Take expected sales less break-even sales. If you expect 450 units and break even at 300, the margin of safety is 150 units, or about 33% of expected sales.

Does the break-even point include tax?

No. The standard calculation looks at revenue, variable costs and fixed costs, so it shows the sales needed to cover costs before tax. Use sales figures without VAT, because VAT collected is not income to the business.

Break-even point: formula and examples

The short answer

Break-even point (units) = fixed costs divided by contribution per unit.

Your break-even point is the level of sales at which total revenue equals total costs, so you make neither a profit nor a loss. Contribution per unit is the selling price minus the variable cost of one unit.

If you want to know how to calculate break even, start with those three figures: fixed costs, selling price and variable cost per unit.

What you need before you start: fixed costs and variable costs

Fixed costs stay the same whatever you sell in the period. Variable costs move with sales. Keep the costs and sales in your break-even calculation within the same period.

Fixed cost examples	Variable cost examples
Rent	Materials
Insurance	Packaging
Software	Delivery per item
Owner pay	Card fees per sale

Include your own pay as a fixed cost if you want break-even to mean "I am covered". Some costs are semi-fixed: a phone bill might have a fixed rental plus a usage charge. Split these into fixed and variable parts.

Use prices without VAT. VAT collected is not income to the business.

How to calculate break-even, step by step

Here is how to find your break-even point from your costs and selling price:

List fixed costs. Add the overheads for the period, including your own pay if that is part of your planning target.
Work out contribution per unit. Subtract variable cost per unit from the selling price, excluding VAT.
Divide. Fixed costs divided by contribution per unit gives the number of units needed to break even.
Convert to sales. Multiply break-even units by the selling price to find the sales value.

Worked example: a product business

This is a monthly illustration using assumed figures, not a forecast for your business. Assume fixed costs of £6,000: rent £1,500, software £300, insurance £200, owner pay £3,000 and other overheads £1,000.

Assume a selling price of £50 excluding VAT and variable costs of £30 a unit for materials, packaging, card fees and delivery.

Contribution per unit: £50 minus £30 = £20.
Break-even units: £6,000 divided by £20 = 300 units a month.
Break-even sales: 300 × £50 = £15,000 a month.

In this illustration, the contribution from 300 units covers the assumed fixed costs, leaving neither profit nor loss.

Break-even in pounds of sales

To calculate the break-even point in sales value, divide fixed costs by the contribution to sales (C/S) ratio. That ratio is contribution divided by sales revenue, or contribution per unit divided by selling price.

Break-even sales (£) = fixed costs divided by the C/S ratio.

Using the same assumed product illustration, £20 divided by £50 gives a C/S ratio of 40%. £6,000 divided by 0.4 gives £15,000 of sales, matching the units method.

Margin of safety and target profit

The margin of safety shows how far expected sales sit above break-even. Subtract break-even sales from expected sales; for the percentage, divide the difference by expected sales.

In the same illustration, assume expected sales of 450 units a month. With break-even at 300 units, the margin of safety is 150 units: 150 divided by 450 = 33.3% of expected sales. At the assumed £50 selling price, that is £7,500 of sales.

For a target profit, add that target to fixed costs before dividing by contribution per unit.

Assume a target profit of £2,000 a month in this illustration: (£6,000 + £2,000) divided by £20 = 400 units, or £20,000 of sales. The target is before tax.

What if prices or costs change

Each row below is an illustration using the assumed monthly product figures. Change one assumption at a time; the other assumptions stay at the base case.

Illustrative scenario	Contribution per unit	Break-even units a month
Base case: price £50, variable cost £30, fixed costs £6,000	£20	300
Price cut to £45	£15	400
Variable cost rises to £35	£15	400
Fixed costs rise by £1,000 to £7,000	£20	350

A lower price or higher variable cost leaves less from each sale to cover overheads. Higher fixed costs mean more contribution is needed in total.

Worked example: a service business priced by the hour

This separate monthly illustration uses assumed figures: fixed costs of £4,500, a charge of £60 an hour excluding VAT and variable costs of £10 an hour. Contribution is therefore £50 an hour.

Break-even is £4,500 divided by £50 = 90 billable hours a month. If the business has an assumed 120 billable hours available, break-even uses 75% of those hours: 90 divided by 120.

Where break-even falls short

Break-even is a planning tool with assumptions. It is most useful over a short period and within a range of activity where those assumptions hold:

One product or a constant sales mix. If the mix changes, the contribution from total sales changes too.
Steady prices and costs. Price cuts to win volume or economies of scale can change the calculation.
Straight-line revenue and costs. The method assumes both change evenly with volume, which may only hold over a restricted range.
A workable split of costs. Semi-fixed costs need separating into fixed and variable parts.
Fixed costs within a relevant range. An overhead that stays fixed at one level of activity may change at another.

Break-even, profit and cash

Profit break-even is not cash break-even. Loan capital repayments and stock purchases affect cash, so covering the costs in this calculation does not by itself show that cash is covered. Read cash flow explained alongside understanding profit and loss.

For tracking performance, see monthly management accounts and KPIs for small businesses. Our pricing and margin calculator includes break-even planning.

If you want support with regular reporting, see our management accounts service.

Know your numbers before you commit to a cost.

If you want help working out your own break-even point, or setting up monthly figures so you can track it, talk it through. Book a 30-minute call. We'll confirm whether we're a fit, and if we are, we'll tell you exactly what the next step looks like.

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Break-even point explained: formula and worked examples

Quick answer