1. What Is a Breakeven Point?
The breakeven point is when your total revenue equals total costs—meaning you’re not making a profit, but you’re not losing money either. It’s a vital calculation for pricing, budgeting, and investment decisions.
2. Why Breakeven Calculation Matters
- Helps determine minimum sales needed to avoid losses
- Informs pricing strategy
- Guides financial forecasts and business planning
- Supports decisions on cost control and sales targets
3. Breakeven Formula
Breakeven Point (in units) = Fixed Costs / (Selling Price per Unit – Variable Cost per Unit)
Where:
- Fixed Costs = Costs that stay the same regardless of sales (e.g., rent, salaries)
- Variable Costs = Costs that change with each unit sold (e.g., materials, packaging)
- Selling Price = How much you sell each unit for
4. Breakeven Example
Imagine you sell handmade candles:
- Fixed Costs: £2,000/month (rent, salaries, insurance)
- Selling Price per Candle: £15
- Variable Cost per Candle: £5
Breakeven Point = £2,000 / (£15 – £5) = 200 units
You need to sell 200 candles per month to break even.
5. Breakeven Revenue Formula
To find how much money you need to generate, use:
Breakeven Revenue = Breakeven Units × Selling Price per Unit
From the example above:
Breakeven Revenue = 200 × £15 = £3,000
6. Contribution Margin
A key part of breakeven analysis is the contribution margin, which is:
Contribution Margin = Selling Price – Variable Cost
It shows how much each sale contributes to covering fixed costs and, eventually, generating profit.
7. Margin of Safety
This tells you how much sales can drop before you reach your breakeven point.
Margin of Safety = (Actual Sales – Breakeven Sales) / Actual Sales × 100
It helps assess business risk.
8. Limitations of Breakeven Analysis
- Doesn’t consider changes in fixed or variable costs
- Assumes constant pricing and sales
- Doesn’t factor in external market changes or demand fluctuations
Still, it’s a useful planning tool when used alongside other financial forecasts.
9. How to Use Breakeven in Business
- Test pricing changes
- Evaluate new product viability
- Assess risk of expanding operations
- Set minimum sales targets for survival
10. Tools to Calculate Breakeven
- Excel or Google Sheets (simple formulas)
- Business planning software (LivePlan, QuickBooks)
- Accounting software (Xero, FreeAgent)
Frequently Asked Questions
What is the breakeven point in business?
It’s the sales level where total revenue equals total costs—no profit, no loss.
How do you calculate breakeven in units?
Divide fixed costs by the contribution margin (selling price minus variable cost).
Can breakeven analysis be used for services?
Yes. Use hourly rates and service delivery costs instead of per-unit figures.
What is a good breakeven point?
The lower the breakeven point, the better—it means you need fewer sales to cover costs.
Is breakeven the same as profitability?
No. Breakeven means zero profit. Profit starts after breakeven sales are exceeded.
How often should I review my breakeven point?
Review regularly—especially when costs, pricing, or sales volumes change.
Conclusion
Breakeven calculation is a fundamental financial tool for any business. It gives you a clear target for covering costs and helps shape pricing, investment, and growth decisions. By mastering this calculation, you ensure your business stays financially on track and better prepared for change.