How to Do a Break-Even Analysis
(With Examples)

Before you launch a product, set a price, or scale your business, there's one question that matters above all others: how much do you need to sell before you stop losing money? A break-even analysis gives you that answer with mathematical precision.

What Is a Break-Even Point?

Your break-even point is the level of sales at which your total revenue exactly equals your total costs — meaning you're neither making a profit nor a loss. Every unit sold beyond that point generates profit. Every unit below it means you're still operating at a loss.

Understanding your break-even point helps you make smarter decisions about pricing, minimum order quantities, whether to launch a new product, and how long you can sustain a slow period.

Fixed Costs vs Variable Costs

Before calculating your break-even point, you need to separate your costs into two categories:

• Fixed costs: Costs that don't change regardless of how much you sell. Examples: rent, software subscriptions, salaries, insurance, loan repayments.
• Variable costs: Costs that increase with each unit sold. Examples: materials, packaging, payment processing fees, shipping, freelancer commissions.

This distinction is fundamental. Fixed costs are what you have to cover before making a single dollar of profit. Variable costs reduce your profit margin on each sale.

The Break-Even Formula

The standard break-even formula is:

• Break-Even Units = Fixed Costs ÷ (Selling Price − Variable Cost per Unit)

The denominator (Selling Price − Variable Cost) is called the contribution margin — the amount each sale contributes toward covering your fixed costs and eventually generating profit.

A Practical Example

Let's say you make and sell handmade candles:

• Fixed costs per month: $800 (workshop rent + e-commerce subscription + utilities)
• Selling price per candle: $25
• Variable cost per candle: $8 (wax, wick, jar, packaging, payment fees)
• Contribution margin: $25 − $8 = $17

Break-Even Units = $800 ÷ $17 = 47.1 candles per month

You need to sell at least 48 candles every month just to cover your costs. Sale number 49 is where you start making actual profit.

Break-Even in Revenue Terms

Sometimes it's more useful to think in terms of revenue rather than units:

• Break-Even Revenue = Fixed Costs ÷ Gross Margin %
• Gross Margin % = (Selling Price − Variable Cost) ÷ Selling Price × 100
• In our example: $17 ÷ $25 = 68% margin
• Break-Even Revenue = $800 ÷ 0.68 = $1,176/month

How to Use Break-Even Analysis for Pricing Decisions

Break-even analysis becomes powerful when you test different price points. What if you raised the candle price from $25 to $30?

• New contribution margin: $30 − $8 = $22
• New break-even: $800 ÷ $22 = 36.4 candles

A $5 price increase reduces your break-even point by 11 units — nearly 25% fewer sales needed just to cover costs. This kind of analysis is far more valuable than guessing.

Limitations to Be Aware Of

Break-even analysis is a simplification. In practice:

• Variable costs aren't always perfectly linear (bulk discounts, setup costs)
• The model assumes you sell everything you produce — no unsold inventory
• It doesn't account for the time value of money
• Fixed costs may change at certain volume thresholds (needing bigger space, extra staff)

Use it as a starting point for decision-making, not as a guaranteed predictor. Combine it with our Profit Margin Calculator to get a complete picture of your business economics.